Is Government Bigger in Canada than in the US?

There are several interesting articles in the most recent (June 2007) issue of Canadian Public Policy, but the one that grabbed my attention examines the size of government in Canada and the US. Most commentators assume that the Canadian public sector is significantly larger. A few point out that the huge reduction of Canadian-government spending (relative to GDP) since the early 1990s and the post-9/11 surge in American-defence spending have substantially narrowed the gap.

By factoring out differences in national-accounting methods, Stephen Ferris and Stanley Winer conclude that government is almost exactly the same size in both countries. Half of the apparent difference between Canadian and American public spending simply reflects differing classifications of non-profit entities. All Canadian universities and hospitals, and most other non-profit organizations, are counted as part of government because they receive more than 50% of their funding from it. Meanwhile, comparable American institutions receiving a majority of their funding from government are counted in the private sector because they are not directly controlled by government.

Another difference is that Canadian statisticians assume faster depreciation than American statisticians for government assets. As a result, a given government investment appears to cost more in Canada than in the US. This difference is partly offset by the fact that Canadians count armaments as one-time consumption whereas Americans count them as depreciating assets, which tends to understate Canada’s defence spending (or overstate US defence spending) relative to GDP.

Ferris and Winer conclude that, on a properly comparable basis, government spending accounted for 38.5% of Canadian GDP and 37.0% of American GDP in 2004. They also estimate that the cost of delivering government services has increased faster than the general price level. In “real” terms, government spending has declined slightly since the early 1960s in both countries. In 2004, it accounted for 27.1% of Canadian real GDP and 27.0% of American real GDP.

Another interesting point is that, even without any of these adjustments, government transfers to people (i.e. social programs) now account for less of GDP in Canada than in the US. However, government transfers to business are much higher in Canada than in the US.

This research debunks the view that Canada’s government is excessively large compared to the US. It also suggests that those of us who believe in having more public services and investment than the American model have a lot of work to do.