Measuring public sector size in the advanced market economy countries: The problem of deflators

Abstract

A great deal of scholarly attention has been directed to understanding the causes of the growth of the public sector in the developed market economy countries in recent decades. Unfortunately, this literature has been clouded by uncertainty over measurement of the central variable at issue, the relative size of the public sector. Traditionally, public sector size has been measured as the ratio of government expenditures to GDP, with both figures expressed in current national currencies. Recently, however, this standard approach has been criticized by those who argue that figures for government expenditures and GDP should be separately deflated to account for different rates of inflation in the public sector and the economy as a whole. The purpose of this paper is to explore the empirical relationship between same- and different-deflator indicators of public sector size, focusing on social expenditures in 19 developed market economy countries over the period 1960–1981. The analysis finds that same- and different-deflator indicators are generally strongly correlated and that the choice of deflators, while of some importance, is not of overriding significance in assessing four major explanation of public sector growth in the countries examined.