Governments use a mix of their own employees, capital and purchasing from non-profits or private entities to produce goods and services delivered to citizens. There are two ways to outsource: by purchasing goods and services to be used as inputs (i.e. intermediate consumption), or by contracting out the provision of goods and services to private or non-profit providers.
The production costs of government accounted for 20.6% of GDP in 2017 across OECD countries. Compensation of employees is the largest component (9.2%), followed by costs of goods and services used and financed by government (8.7%). These proportions remained relatively stable when compared to 2007. Scandinavian countries such as Sweden (30.0%), Finland (29.7%) and Denmark (28.1%) have the highest production costs in terms of GDP reflecting generalised provision of publically funded services as well as relatively high costs. In turn, Mexico spent the least in the OECD explained (11.8%), among other factors, by comparatively fewer and lower quality public services and wealthiest segments of the population opting for private service providers.
While production costs in terms of GDP increased by 0.4 p.p. on average in the OECD between 2007-17, compensation of employees has decreased (0.2 p.p.). The largest reductions in compensation costs were observed in Ireland (3.1 p.p.) and Portugal (2.2 p.p.). Since 2008, Ireland and Portugal implemented compensation reforms such as reductions of remuneration for all staff, reduction or abolishment of allowances, reduction of performance-related pay/bonuses and pay freezes. Ireland also implemented a remuneration reform specifically directed at the top level. Compensation costs increased in Norway (3.1. p.p.) during the same period, as public employment grew between 2007-17.
The structure of production costs varies across OECD countries. On average compensation of employees amounted to 44.8% of total costs in OECD countries in 2017; goods and services used and financed by government represented 42.3%; and other production costs amounted to 12.9%. However, for example in Mexico, compensation of employees represented 71.5%, goods and services used and financed by government represented 27.5% and other production costs came to 1.0%. In turn, the cost allocation in Japan is substantially different from the OECD average: goods and services used and financed by government amounted to 58.7%; 25.5% were for compensation costs and 15.7% for other costs.
On average in 2017, across OECD countries, goods and services used by government represented 5.7% of GDP, and those financed for private provision to citizens represented 3.0%. In the Netherlands, services financed by the government represented 10.2% of the country’s GDP (the highest in OECD countries) driven mainly by a health system managed by the government but supplemented by private insurers. Reaching 8.8% of GDP, the second-highest share among OECD countries spent on financing goods and services privately provided is in Japan, where only 3.7% of GDP is spent in intermediate consumption. Such low value reflects a model where the provision of services is largely left to the private sector while the government retains the primary roles of regulating and partially funding goods and services.
