The production costs of government are public expenditures on the goods and services which government uses, primarily wages and purchases of goods and services. Government spending that does not involve a purchase – for example, social welfare, unemployment benefits and other transfers – is not a production cost. Outsourcing is the portion of government production costs which is used to buy goods and service from entities outside of government, i.e. government purchases from private companies and other agencies.
Government production costs averaged 20.6% of GDP across OECD members in 2019. Sweden (29.7%), Finland (29.6%) and Norway (28.8%), all Scandinavian countries, have the highest production costs in terms of GDP, reflecting both the widespread provision of publicly funded services and relatively high costs. Mexico spent the least in the OECD (11.8%). Among other factors, this is explained by relatively fewer services, and the wealthiest segments of the population opting for private service providers. Government production costs were largely stable in most countries from 2007 to 2019. However, they rose in all 26 countries for which data are available for 2020, with spending increases on both employee compensation and goods and services. The largest rise was in the United Kingdom (3.9 p.p. of GDP). This was driven primarily by expenditure on goods and services increasing by 2.6 p.p. (Figure 2.35).
The structure of production costs varies across countries. In 25 of 36 OECD countries, employee compensation made up the largest share in 2019, averaging 44.5% of production costs, or 9.2% of GDP. Wage expenditures are not necessarily related to either the average wage levels in a country or the structure of the government. Denmark (54.6%) and the Netherlands (29.8%) spent very different shares of production costs on employee compensation, despite having nearly identical GDP per capita. Ireland (48.4%) and Canada (48.8%) spent almost identical shares, even though Ireland has a highly centralised government and Canada a federal system. Purchases of goods and services used and financed by government are the second largest element of production costs in 25 of 36 OECD members. They averaged 42.7% of production costs, or 8.8% of GDP, in 2019 (Figure 2.36).
On average, governments spent 8.8% of GDP on outsourced expenditure in 2019 (Figure 2.37). Of this, 65% was spent contracting non-government economic actors to provide goods and services used directly by the government (e.g. government IT systems) and 35% on providing goods and services to citizens (Online Figure G.25). These may include health care, housing, transport or education. Outsourcing costs increased notably in 2020. All 26 countries with data available increased expenditure as a percentage of GDP on both categories of outsourcing in 2020 (Figure 2.37).
