ABSTRACT
The view that public sector growth is inflationary is widely held. As early as 1945 Colin Clark had argued, in a controversial paper, that inflationary pressures would be created when the government's share of national income would exceed 25 per cent. 1 More recently Clark, who continues to be a leading protagonist of this view, has said ‘the basic cause of inflation is excessive government expenditure and the excessive taxation which goes with it’. 2 Milton Friedman 3 takes a similar line when he argues:
The more fundamental source of inflation in all our countries and of our economic difficulties has been the change in philosophy that occurred some time in the 1930s and earlier away from the belief in an individualistic society and toward a belief in the welfare state. The basic source of our difficulties is really the movement toward a welfare state because it is that movement toward a welfare state that had increasingly led us to expand our scope of government. And as government has expanded its scope, it has become increasingly difficult to finance the activities of governments by direct taxes and therefore has made the implicit hidden tax of inflation an ever more attractive strategy.
This is also the view of Jackson-Turner-Wilkinson: 4
The fact that this (inflationary) disturbance started in the industrial countries … appears to confirm the importance we attach to the fundamental change in the background conditions of the preceding era (of moderate inflation) which was brought about in the late 1960s by the great increase in direct taxation on wage earners.
