This component considers the level of government expenditures as a percentage of GDP. Government expenditures, including consumption and transfers, account for the entire score.
No attempt has been made to identify an optimal level of government expenditures. The ideal level will vary from country to country, depending on factors ranging from culture to geography to level of development. However, volumes of research have shown that excessive government spending that causes chronic budget deficits and the accumulation of sovereign debt is one of the most serious drags on economic dynamism.
The methodology treats zero government spending as the benchmark, and underdeveloped countries with little government capacity may receive artificially high scores as a result. However, such governments, which can provide few if any public goods, are likely to receive lower scores on some of the other components of economic freedom (such as property rights, financial freedom, and investment freedom) that reflect government effectiveness.
The scale for scoring government spending is non-linear, which means that government spending that is close to zero is lightly penalized, while levels of government spending that exceed 30 percent of GDP lead to much worse scores in a quadratic fashion (for example, doubling spending yields four times less freedom). Only extraordinarily large levels of government spending—for example, over 58 percent of GDP—receive a score of zero.
The expenditure equation used is:
GEi = 100 – α (Expendituresi)2
where GEi represents the government expenditure score in country i; Expendituresi represents the total amount of government spending at all levels as a portion of GDP (between 0 and 100); and α is a coefficient to control for variation among scores (set at 0.03). The minimum component score is zero.
In most cases, general government expenditure data include all levels of government such as federal, state, and local. In cases where general government spending data are not available, data on central government expenditures are used instead.
Sources. Unless otherwise noted, the Index relies on the following sources for information on government intervention in the economy, in order of priority: Organisation for Economic Co-operation and Development data; Eurostat data; African Development Bank and Organisation for Economic Co-operation and Development, African Economic Outlook 2012; International Monetary Fund, Staff Country Report, “Selected Issues and Statistical Appendix,” Staff Country Report, “Article IV Consultation,” 2009–2012, and World Economic Outlook Database 2012; Asian Development Bank, Key Indicators for Asia and the Pacific, 2009–2012; African Development Bank, The ADB Statistics Pocketbook 2012; official government publications of each country; and Economic Commission for Latin America, Economic Survey of Latin America and the Caribbean 2010–2011 and Macroeconomic Report on Latin America and the Caribbean—June 2012.