The Size and Composition of Government Spending in Europe and Its Impact on Well‐Being

This paper empirically analyzes whether large governments in Europe reflect efficient responses to a changing social and economic environment (‘welfare economic view’) as opposed to wasteful spending (‘public choice view’). To this end, the effect of government size on subjective well‐being is estimated in a combined survey and country‐level dataset covering 153,268 respondents from twelve EU countries over the 1990–2000 period. The first finding is an inversely U‐shaped relationship between government size and well‐being. In addition, the analysis suggests that given the high institutional quality as compared to other parts of the world there might be scope for a further enlargement of governments in the EU from a well‐being perspective. However, one must acknowledge that the effect on well‐being may be quite small and that democratic societies in Europe have no experience with even larger governments. The investigation also reveals that the impact of government size on well‐being depends negatively on levels of corruption and positively on the extent of decentralization. Moreover, left‐wing voters and low‐income earners are the main beneficiaries of a large public sector. Finally, in all twelve EU countries included in the sample higher levels of well‐being could have been achieved by allocating a higher share of public resources to education, while Finland and Germany could have given an additional boost to well‐being by cutting expenditures on social protection.