Rising Government Spending in the EU Erodes Prosperity

The more the state takes from citizens in taxes and levies, the larger its share of the economy becomes. New figures from Eurostat show how differently EU countries are positioned in this respect.

Eurozone and weaker growth in 18 of 20 countries.

Euro membership has coincided with weaker average growth in 18 of the 20 countries examined, raising doubts about whether the remaining holdouts would benefit from joining. Photo: Mark Renders/Getty Images

The performance of an economy depends on many factors. One of them is government spending as a percentage of gross domestic product (GDP). A well-known remark attributed to former German chancellor Helmut Kohl holds that socialism begins once the state’s share exceeds 50 per cent. The higher the proportion of money managed by the state, the greater the influence of public finances on the wider economy. As a general rule, welfare states tend to have higher spending levels than more economically liberal systems such as the US, where the figure stands at just under 38 per cent this year.

A commonly cited argument is that every euro passing through the state ultimately loses value. Of each euro administered by the state, collected through taxes and levies and then redistributed according to its own criteria, experts estimate that between 5 and 15 per cent is absorbed by administrative costs. In other words, of every euro in tax revenue, only 85 to 95 cents return to citizens in the form of investment or social benefits. The higher the level of government spending, the greater the losses relative to GDP – and thus the amount no longer available to households and businesses.

A Comparison of the Public Spending of EU Member States. Graphik: statement.com

Welfare Systems Generate High Costs

European countries, with their extensive welfare systems, generally rank well above that level. Germany’s government spending is forecast to reach 51 per cent this year, up from 49.4 per cent in 2024 (see chart). In some market-oriented economies, efforts have been made to place legal limits on the size of the state. For more than a decade, Germany’s Federal Constitutional Court (Bundesverfassungsgericht, BVerfG) upheld the so-called ‘half-sharing principle’, which stipulated that the state should not claim more than 50 per cent of citizens’ income in taxes. The principle was also intended as an indirect constraint on overall government spending.

In 2006, the same court revised its position, effectively opening the way for significantly higher spending levels. Even so, an informal ceiling of around 50 per cent persisted for many years in German economic and fiscal policy.

Half for the State

Empirical data suggest that such caution may have been justified. International studies and OECD data indicate that beyond roughly 45 per cent, growth, productivity and employment begin to decline measurably. At the same time, countries such as Switzerland and Ireland – at 33.6 per cent and 22.4 per cent respectively – demonstrate that a relatively small state can coexist with strong performance. Ireland is among the most dynamic economies in the EU, with real GDP growth of 2.6 per cent in 2024, while Germany’s economy contracted by 0.2 per cent over the same period. Across the EU’s 27 member states, the average level stood at 49.2 per cent in 2024, with Finland at the top at 57.7 per cent.

With government spending at 55.2 per cent of GDP, Austria ranked among the three countries with the highest public expenditure in Europe in 2024. Only Finland and France, at 57.3 per cent, recorded higher levels, approaching figures once associated with socialist Eastern bloc states such as the former German Democratic Republic, where a centrally planned economy was said to correspond to a level of around 60 per cent.

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According to the latest projections by the European Commission, Austria’s level of government spending is set to remain elevated in the coming years: 55.2 per cent is expected for 2025 and around 54.9 per cent for 2026. This means that well over every second euro generated by citizens is spent by the state.

In such economies, weaker economic performance often follows. Austria’s economy contracted by 1 percentage point in 2024. The European Commission also expects government spending to rise further in most of the EU’s 27 member states in the years ahead.