Question: We know that GDP is the total value of goods and services produced within a state. Does this include public services? If so, what is the value of education or health services, for example? How is it calculated? And to what extent do these services contribute to increasing or decreasing GDP? In other words, is the GDP of a “welfare” state lower than one that offers no social benefits? Please enlighten me. – Michèle Ruel, Sainte-Agathe-des-Monts
Gross domestic product (GDP) includes the production of all goods and services in the economy, including those of governments. Public services such as health, education and others are therefore included in GDP.
GDP is calculated in three different ways, the two best known of which are the expenditure approach and the income approach.
With the income approach, it is possible to extract the values attributed to the health and education sectors. This approach adds up all income of economic actors, including employee compensation and net income of companies (profits), to which are added government income (taxes minus subsidies), among others.
For health and education, it is therefore the payroll of staff which determines, in the GDP, the level of these services offered to the population, in particular.
Thus, the public sector strike last fall reduced the hours of services offered to taxpayers and therefore the GDP. Conversely, during the pandemic, the increase in the volumes of health services increased the GDP.
Such an increase, in the long term, however, requires the collection of more taxes from individuals and businesses, which reduces their income or profits, and therefore the GDP, all other things being equal.
The strong presence of the State in the economy, as is the case in Quebec, can have beneficial effects in the long term, but also harmful effects.
For example, a more educated population, thanks to the education system, is likely to improve the functioning of the economy. Not only are better-educated employees more efficient, they also contribute to innovation and productivity, which increases GDP per hour worked.
Moreover, a more educated, healthier population that benefits from good social services is also likely to improve social cohesion and well-being, which can promote economic growth.
On the other hand, an obese government may impose too high taxes on individuals and businesses. This heavy tax burden may harm the competitiveness of businesses and therefore economic growth and GDP (a business that pays too much tax will not be able to offer goods at prices as low as its competitors).
Moreover, a state that is too generous to its citizens could harm the motivation of some to seek solutions outside the state to live well, harming the dynamism of the economy.
In short, a balance is needed, which is the subject of debate among economists of various persuasions.
According to the recent Overview of public finances from the University of Sherbrooke, the health sector represented 13.4% of the GDP in Quebec in 2022, while that of primary-secondary education amounted to 4.1% of the GDP1.
If Quebec were a country, these spending levels would place it respectively at 2e rank and 7e rank among the major industrialized countries. In health, 73% of spending is public in Quebec, and in education, 93%.
As Quebec’s GDP reached $546 billion in 2022, according to Statistics Canada, we can estimate that the GDP of health (public and private) was around $73 billion, and that of primary-secondary, $22.4 billion.
Read the article “Our welfare state has big challenges”
Check out the Panorama of Quebec’s public finances 2024
Check out our “Demystifying the Economy” section