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Cut the Spending, Spare the Poor

PARIS – Why do some governments spend more than others? The question is more complicated than it appears, especially in the case of European governments.

The answer may look obvious when comparing, say, Denmark (where public spending, excluding interest payments on debt, amounted to 58% of GDP in 2012) and the United States (where the same number was 35%). Extensive public services and a comprehensive welfare state appear to be the indisputable explanation. The data seem to vindicate German Chancellor Angela Merkel’s famous statement that Europe’s problem is that it accounts for 7% of the world’s population, 25% of its GDP, and 50% of its social spending.

From this perspective, European governments face an uncomfortable choice. Most are seeking ways to contain public indebtedness, trim deficits, and cut spending without making their poorer citizens worse off. But, judging by the experience of the US and other non-European countries, they may have to choose between insolvency and inequality. Having reached the point at which taxes can scarcely be increased further, these governments cannot both repay their debts and keep welfare spending at current levels.

The answer, however, is less obvious when comparing European countries to one another. Most share a preference for socializing risk and an aversion to inequality – the pillars of the “European social model.” Yet their public-spending levels differ significantly.