Estimating optimal government spending: A psycho‐econometric approach

Abstract We explain total life satisfaction (TLS) using Wave 5 of World Value Survey data covering 58 countries/jurisdictions by regressing TLS on key explanatory variables. By maximizing individuals' TLS with respect to the share of government spending in GDP, we find that optimal government spending increases with the quality of governance, and that the average total public spending for good public governance countries is very close to (slightly smaller than) average optimal total public spending, which is estimated at 36.85% of GDP at the mean values of key dependent variables. There is, however, significant overspending or underspending for individual countries. While healthcare spending is on average close to optimal, education spending is on average noticeably higher than optimal. An increase in per capita GDP reduces optimal healthcare spending but increases optimal education spending as a percentage of GDP. Both optimal spending on healthcare and that on education increase with population aging.