The size of government is one of ten components that are included in the Freedom Barometer. To measure it we use data from the Fraser Institute’s Economic Freedom in the World Index. The component looks at the level of government consumption, taxation and government involvement in economic affairs through subsidies and direct ownership. Among the countries of the Western Balkans region, Albania scores best (8.26 out of 10 points) when it comes to the assessment of the Size of Government indicator. Croatia scores lowest, achieving only 5.28 points out of 10. In between there are Serbia (5.88), Montenegro (5.72) and Bosnia & Herzegovina (5.32).
The reasons for Albania’s excellent score are low levels of government spending and taxation, compared not only to the other countries in the region, but also to the whole of Europe. Last year data reveal the same, when consolidated public spending leveled at 27.2% which is at about 20 to 15 percentage points lower than the EU historical average. Furthermore, taking into consideration relatively robust economic growth, a deficit of around 3% seems sustainable. Low levels of spending do not ask for adverse taxation, resulting in private and corporate income tax at the level of just 10%.
Contrary to the example of Albania other regional countries perform much worse. Serbia’s taxation, for example, is at moderate levels in 2012. But with very high government spending – a half of the whole economy - it ran a high deficit of 7% of GDP. Croatia has the highest income tax within transitional economies, with the highest marginal tax rate of 40% and a moderate corporate tax rate of 20% putting great burden to private savings and consumption. Bosnia & Herzegovina in the relevant area has very high direct government involvement in the economy through public enterprises and government investments. A similar case is that of Montenegro.
What is the message of this observation?
Government spending in itself does not have to be harmful to economic development. Education, infrastructure, the judiciary branch, and security are useful to almost every citizen however financed. If the money is spent wisely it can have many positive effects. But the case of the Western Balkans countries is quite the opposite. Rampant corruption, high levels of government intervention, an inefficient public sector, and unsound economic subsidies waste future economic prosperity in exchange for only little positive effects in the present.
The great chunk of money is transfer through welfare programs from savings to current consumption. And not just today's savings - with long track of running high deficits, countries are spending future generations’ incomes to lessen the difficulties of the current recession. However, with this size of government spending, especially Serbia and Bosnia & Herzegovina, are putting great burden on the future and make even higher taxes necessary. This will harm future growth, limit possibilities for private capital accumulation and the development of a sustainable market economy. Other than Albania, the Western Balkans countries rushed to spend at the level of highly developed economies, without a sustainable transitional platform that will create future wealth.