The world is in the midst of a seemingly unending sovereign debt crisis with many nations either unwilling or unable to control government spending. One measure that investors might use to track these expenditures on a global basis is government spending expressed as a percentage of GDP.
In 2019, according to World Bank data, major countries with the highest government spending levels as a percentage of GDP are spread across the globe and include some of the wealthiest nations in Europe, along with some of the world's poorest countries. The country with the highest percentage was Lesotho at 39.61%, and the lowest value was Chad at 3.59%.
- Government spending as a percentage of gross domestic product (GDP) is a way to assess a country's fiscal management.
- The World Bank provides a list of all countries and their government spending to GDP ratio.
- At the top of the list is Lesotho while at the bottom of the list is Chad, both African nations.
- Many European countries are in the top 10, but that does not signal poor fiscal management.
- Government spending to GDP can be a misleading ratio as it does not take into consideration revenue earned by the government or how the money is used and how efficiently.
Lesotho is a small, land-locked country surrounded by South Africa. It is considered to be a low-middle income country with a population of 2.1 million and a GDP per capita of $1,118. The country gained independence from Britain in 1966 and is ruled by a monarchy as head of state and a prime minister as head of the government.
The country's economic performance has suffered in the past few years due to slow growth in the global economy and natural disasters. Political instability in the country as well as slow growth in South Africa have greatly impacted the nation. It is estimated that real GDP growth decreased by 1.2% and 0.4% in 2018 and 2019, respectively. GDP growth is expected to average 0.6% between 2019 and 2023, mainly due to the impact of COVID-19.
The country does have many construction-related projects that are expected to increase economic growth, including many green-energy projects; however, unemployment is high at 22.5% and there is a tremendous amount of inequality and poverty. Lesotho's government spending to GDP ratio is 39.61%.
Burundi is a landlocked country in East Africa that is considered a low-income country with 80% of the population working in the agriculture industry. The population is 11.6 million. In 2005, the country implemented free primary education, and for the 2018-2019 school year, enrollment was 120%.
Foreign aid to the country began to decline in 2015, resulting in fiscal and balance of payment difficulties. The country is experiencing weak economic growth but strong population growth, resulting in a per capita income growth of $276 in 2020. Burundi's government spending to GDP ratio is 27.64%.
The biggest spenders in Europe are Sweden (25.85%), the Netherlands (24.51%), and Norway (24.42%).
Although Sweden, the Netherlands, and Norway are at the top of the list, this does not necessarily mean that investors should avoid putting money to work here, as all three countries have AAA sovereign debt ratings from Standard and Poor's and other rating agencies.
The lack of any relationship between investment quality and government spending as a percentage of GDP is demonstrated by examining Switzerland (11.90%) and Albania (11.52%). These two countries spend the least amount as a percentage of GDP, and yet Switzerland has a AAA sovereign rating, and Albania has a B+ rating.
As of 2021, the U.S. has an Aaa rating from Moody's and an AA+ from S&P based on economic strength despite increasing trade tensions between the United States and China. Tax cuts that became law in December of 2017 were expected to cause a sharp increase in the U.S. deficit but the growing economy should counterbalance any fiscal weaknesses.
The country, as much of the world, suffered economically during the Covid-19 pandemic, but the United States's swift vaccine rollout has led to a resurgence in the economy with expected growth. The United States's government spending to GDP ratio is 13.97%.
The Bottom Line
Government spending as a percentage of GDP is a simple metric that some use to assess government spending across the globe. One weakness of this measure is that it considers only the expense side and ignores government revenues generated through taxation and other methods. The government spending as a percentage of GDP, in conjunction with other metrics, reflects government spending more accurately.