Federal Government Spending as a Percent of GDP: Why It Matters to the Small Business Owner

This chart – taken from globaleconomicanalysis.blogspot.com shows that our Federal government spends between 22% – 24% of our annual GDP. Because governments only transfer wealth via taxation, that percent of spending can be viewed as monies that were taken from private entities and spend either for the public good or for political purposes disguised as a public good.

Countries with the highest ratio of Government spending to total GDP tend to be known as the countries that are difficult within which to conduct business. Consider:

  • Zimbabwe – 98%
  • Cuba – 78%
  • Denmark, France and Sweden – 52%

While one would be foolish to invest in the first two countries, the last three have stable economies and represent good investment opportunities for the right investor. But running a business in any of these countries represents accepting an inherent partnership with the Government and their regulations.

As government spending increases, several things necessarily occur:

  1. Business is more likely to gain a growing portion of their income from one or more government contracts. Since the government is the “big dog” in every transaction, this puts the business at a power disadvantage, sometimes imposing process changes, disclosure requirements and over-the-top reporting and compliance costs that are not present in private transactions.
  2. As government spending increases, their ability to demand more and more adherence to regulations grows. The government’s ability to shape a market through onerous regulations and reporting requirements is enormous and can hurt small business.
  3. Governments often choose vendors for political reasons, not business reasons. They make tradeoff decisions without caring about those who are hurt by their decisions. Their power to codify into law who wins and losses by preferencing one group over another for new contracts will help the former while hurting the latter. Instead of creating a market in which businesses compete for government money based on merit, they end up competing based on status and knowledge on how to game the system.
  4. Inefficiencies and distortions are introduced into the market when politics drives spending decisions.

Small business often cannot compete for substantial government contracts because, in part, they don’t have (and can’t afford to hire) the contracting personnel needed to submit a bid for a contract in “government speak”. It is common knowledge in many subcontracting communities that the most important person in an organization who lands government contracts is the person who can consistently write a great bid document in a way that games the system through “government speak”. Given this, plus the preferencing of some groups over others, many small businesses feel “crowded out” by such high barriers of entry to the landing of government contracts. So as the government grows, the small businesses who realistically can’t compete for government contracts end up competing for a smaller part of the pie, making the market a less inviting place in which to conduct for-profit business activities. Should the government grow too large, many small businesses will simply go out of business, creating more unemployment and in turn, more government spending.

If you’re a small business owner, what can you do? Just run your business as lean and profitably as possible. Build cash. It’s your only defense during troubled times. If the opportunity presents itself, go after some government money by subcontracting with a larger prime contractor who will handle all of the headaches on your behalf and will manage the contract for you. And then be active in voicing your thoughts and opinions about the size and scope of the Federal government.

Bill English, M.A., M.Div.
Licensed Pychologist
CEO, Mindsharp
Associate, the Platinum Group