Lessons about National Social Spending

We used to think it was pretty straightforward to rank countries on how much they spend on their “welfare state”  – or social programs.  Scandinavian countries on top, western Europe next, followed by the Anglo countries and southern Europe. Sweden was the ultimate welfare state – “high tax – high transfers.” The USA generally came out at the bottom, with low levels of government involvement.

But our understanding of that is changing!

In recent years, the OECD has begun to look below the surface of gross spending statistics, with some surprising results. Although the Scandinavian governments do spend a lot, they also tax a good deal back through direct taxation of social benefits and taxes on consumption by benefit recipients. This can reduce the countries’ net spending by as much as 5% of GDP! Canada recovers a bit over 1% of GDP by this method, with the USA recovering less than 1%. Countries like Canada, the UK and the Netherlands also subsidize or require more private spending (by employers, for example) on social benefits, and this can account for another 5% of GDP. In the USA, this subsidy of private spending accounts for about 10% of GDP (partly because of private health insurance). Tax credits and other tax-based transfers can account for a substantial amount as well, although the reporting systems still make comparative accounting a bit edgy. Based on these measures, the overall net spending by governments turns out to be highest in countries like France, Belgium, with Germany, Sweden, and the USA close behind, followed by the other anglo countries including Canada. And this still ignores the effect of charity spending, which differs greatly across nations.

Source: Adema, W., P. Fron and M. Ladaique (2011), “Is the European Welfare State Really More Expensive? Indicators on Social Spending, 1980-2012; and a Manual to the OECD Social Expenditure Database (SOCX)” OECD Social, Employment and Migration Working Papers,

No. 124, OECD Publishing.  http://dx.doi.org/10.1787/5kg2d2d4pbf0-en

We open the theme of social spending in this issue, and will return to examine it in more depth in future. We have much to learn about how social objectives are achieved in different societies. In particular, as it becomes apparent that total social effort is more comparable across nations, it may become more useful then to compare the methods and results attained.

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