The production costs of government are public expenditures on the goods and services which government uses. These costs include compensation for government employees (i.e. wages) and purchases of goods and services (e.g. supplies for schools and hospitals, or public funding of private hospitals or health costs reimbursed to citizens). They do not include government spending that are direct transfers to the economy (e.g. spending on social welfare, unemployment benefits and other transfers). Outsourcing is the portion of government production costs which is used by governments to directly buy goods and services from entities outside of government, i.e. government purchases from private companies and other agencies.
Government production costs averaged 20.8% of GDP across OECD members in 2023 (Figure 16.12). In that year, Finland (31.1%), Sweden (30.3%) and France (28.4%) spent the largest proportion of GDP on production costs among OECD countries. This reflects their widespread provision of publicly funded services. Between 2023 and 2024, government production costs in OECD-EU countries increased by an average of 0.5% of GDP, with decreases observed only in Greece (1%), Spain (0.3%), and Denmark (0.2%). In the case of Greece, it could be explained by growth rates that outpaced other EU countries as well as ongoing efforts to achieve spending efficiencies (OECD, 2024a).
The structure of production costs varies somewhat across OECD countries (Figure 16.13). Average spending on compensation of government employees was 42.1% of total production costs. Most OECD countries (30 out of 36) spent more than 40% their total production costs in this area. Costa Rica (71.6%) and Mexico (71%) stand out as the countries with the highest shares of compensation in their government production costs. In the cases of Mexico and Costa Rica, this reflects a high reliance on the direct provision of public services, as well as the additional costs associated with serving widespread, low-density urban areas (OECD 2024b). Moreover, wage expenditures are not necessarily related to the structure of government; for example, Belgium (46.3%) and Switzerland (45.4%), both federal countries, spent very similar shares to Ireland (46.1%), which has a unitary and centralised government. Average spending on purchases of goods and services was 44.5% of total production costs. Most OECD countries (22 out of 36) spent between 30% and 45% of their total production costs in this area.
On average, governments spent 9.2% of GDP on outsourced expenditures in 2023 (Figure 16.14). Of this, 6.2% of GDP was allocated to paying non-government stakeholders for goods and services directly used by the government, while 3.1% of GDP was spent on goods and services provided to the public by non-government contractors but financed by the government. These may include sectors such as health care, housing, transport, and education. In 17 of the 27 countries where data are available, outsourcing costs increased by an average of 0.1% of GDP between 2023 and 2024. The highest increases were recorded in Slovenia (0.6%) and Germany (0.4%).
