Does cutting back the public sector improve efficiency?Some evidence from 15 European countries

The successful development of the welfare state that transpired for three decades after WWII in thedeveloped countries, came to a halt around the end of the 1980s. Since then, the number of articlesand books dedicated to the crisis of the welfare state has increased. We can now assert that at the turnof the century, almost all industrialized countries had cut at least “some” entitlements in their welfareprogram along with other expenditure items, and the trend continued in the first decade of thiscentury. To defend the cuts and possibly to justify continuing cuts, several economic reasons, boththeoretical and empirical, have been highlighted. From mention of Baumol’s disease to the fiscalcrisis, the support for making such decisions by governments gained momentum, with their politicalinspiration changing during the same period in favor of more conservative, right-wing positions. Thelow productivity of the public sector and the high level of tax burden were the substantial argumentsused to support cuts. The aim of this paper is to provide an empirical investigation into the impact ofretrenchment of the public sector on the performance of 15 European countries. In particular, we aimto empirically test the view that “big government” reduces a country's efficiency. We have found thatno such empirical support exists. We have also included analysis of the distribution of income throughthe Gini index and have found the standard trade-off relation between inequality and efficiency.