The Bigger the Government the Smaller Your Pocket
It is always good to ask ourselves if we are spending our money responsibly. Especially during those times when our budgets get tighter, as is the case during this high inflation period. Lately, we hear in the news things like the rich and corporations are not paying enough taxes. Or simply that the government should increase its budget, so it can help the less fortunate in society.
I will not judge whether those measures could be good or not. They are already addressed in the mainstream media. I would like, however, to touch on a third option. Have you ever wondered how much you pay to finance the government or how much you pay in taxes? Calculating that exact number for each individual might be a bit complicated, but I will show you a quick way to estimate that, so you can be better informed to assess the current economic and political environment.
How to Calculate GDP?
For that, first, we need to introduce the concept of GDP (Growth Domestic Product). It tells you the amount of money that a country produces. Check Investopedia for a fancier definition 🙂
Below is the formula. It might look boring, but bear with me:
GDP=C+G+I+Nx
To calculate how much a country produces, we simply add:
- Consumption (C): The amount of stuff or services that everyone buys.
- Government spending (G): The amount of money the government spends.
- Investment (I): These are the investments from everyone. Your savings would be included here since the bank in the background lends that money.
- Net Exports (Nx): The amount of stuff we export or import. If we import more than what we export, this would be negative. If not, positive.
If we add up all of the above, we have the total number. And here comes the trick. If we compare government spending (G) against GDP, we can get an approximation of how much taxes all citizens and companies pay to sustain the government.
For example: if we would divide G/GDP and get as a result 30%, that would mean that the government is 30% the size of the whole production of the country.
Government vs GDP
A country’s production for a given year is fixed. But the way money gets distributed in the four categories mentioned above can vary.
The government gets financed by people and companies through taxes or debt. If the government grows bigger, it means people pay more taxes, and they have less money to spend or invest.
So now that the mechanics are clear try to answer the following. Consider all the services and benefits that your state offers to you and the rest of society. Then think about what would be the percentage of your income that you would gladly pay in exchange. It is not an easy question, but let it sink and come up with your number.
How Much Does Our Government Cost Us?
With the number you feel satisfied with in mind, take a look at the following graph. In it, you can see the percentage of government spending as a percentage of GDP. For the Eurozone (green), Germany (black), Spain (orange), the Czech Republic (blue), and the US (red).
Is your number higher or lower? Does this change some of your views?
Let’s make some sense of those numbers: In the case of Spain, Germany, and the Eurozone on average, the government spends more than 50% of the whole country’s production. This is the same as saying that society pays more to the government than to themselves. If you are a German or Spanish citizen you get 49 euros while the government gets 51.
The fact that your government is half the country’s budget would also imply that a citizen would pay more to the government than what they pay in total for shelter, energy, and food.
Let’s take it a bit further. In these cases, the government controls more than half of everyone’s budget. That means half of the resources. As citizens, we don’t get to choose whether we pay or not; we just have to. This should raise the question of whether citizens have enough freedom or not.
The government’s budget comes from taxes or debt. Taxes are required by law so you don’t have a choice but to pay them. Debt used to come voluntarily from investors who would decide to finance the government in exchange for a profit.
However in the last few years, the central banks have been buying most of the government debt, so it is no longer a voluntary action for the citizens. The high inflation levels of the last two years are a consequence of that. As you can see the graph shown above, expressed by the increment of government spending during the last 5 years.
Maybe a government size of 50% is ok, but what about 55% or 75%, etc.? Where is the limit?
Why Is This Important?
As you see, the bigger the government, the less freedom for the citizens. Your freedom increases as the resources under your control increase. Also, the bigger the government, the less money is available for other purposes, like consumption or investment.
So the key point I want to make across is that regardless of your political views, left or right-leaning. We should hold our politicians accountable and demand from them, efficiency and austerity. If you are a right winger that values individual freedom over collective benefit, you would want a smaller and more efficient government so your freedom gets increased.
However, If you are a leftist and you value collective well-being over individual freedom, you should want a more efficient government to be able to support more people with the same budget.
We ask the private sector to sell us things better and cheaper every time. With our choices, we force them to make more with less. So let’s take that approach as well with our government.
Let’s vote for those that are concerned about the budget. Let’s vote for those that present us with a cost-benefit analysis of their actions. Let’s discuss these ideas with the people that surround us. Let’s ask ourselves how much is going to cost us the next government program.
Only by being aware, we can induce a change. And the best way to do it is to live by the same standard we demand from them. Be the example that you would like them to be, so others can follow the same steps. If you don’t, the government will grow big. And, the bigger the government the smaller your pockets.
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