“How did North Carolina get into such budget problems” is a frequent question asked among public-policy thinkers and regular citizens during the past couple of years. Although many factors contributed, clearly an important one is that North Carolina spent an increasing share of its income on government functions in the 1990s, and when the economic slowdown and recession came in 2000-‘02, the high level of spending could not be sustained.

Here are the details. North Carolina’s economy experienced tremendous growth in the 1990s. After the recession in the early part of the decade, total income in the state (so-called “gross state product”) grew by a whopping 63 percent, or 42 percent after inflation. This works out to be a 5 percent annual growth rate in inflation-adjusted income, truly a remarkable performance.

Certainly the larger economy of North Carolina could support more government spending. In fact, we would expect government spending to rise with economic growth, as a larger economy requires more highways, more police officers, more school buildings and teachers, etc.

A generous measure of government spending relative to the size of the economy is government spending divided by gross state product. Gross state product is simply the dollar value of all income produced in the state in a given time period, such as a year. Dividing government spending by nominal (unadjusted for inflation) gross state product will allow government spending to rise with inflation and with increases in the standard of living (termed real economic growth).

At the beginning of the economic expansion of the 1990s, in fiscal 1992-‘93, total state and local government spending in North Carolina, exclusive of federal government grants and aid, was 11.5 percent of gross state product. By the end of the decade (fiscal 1999-2000) it had climbed to 12 percent of gross state product.

“Big deal,” you might say, government’s take of the private economy in North Carolina increased by one-half of 1 percent during the boom years of the 1990s. This sounds like peanuts, or to keep the analogy in monetary terms, cents. But hold on to your chair. If state and local government spending in North Carolina had been kept at 11.5 percent of gross state product in1999-2000, rather than the actual 12 percent, governmental spending would have been $1.3 billion lower! Clearly, such a lower rate of spending would have allowed governments in North Carolina to avoid a large part, if not all, of their budgetary problems during the past three years.

We can be more specific and pinpoint what kinds of government spending most increased their share of the state economy during the 1990s. Here’s how this is done.

First, I calculated the percentage of gross state product spent on various governmental categories (education, welfare, transportation, etc.) in fiscal 1992-‘93. I then applied these percentages for the governmental spending categories to gross state product in fiscal 1999-2000. The results were governmental spending in 1999-2000 if each category’s relative share of gross state product remained at 1992-‘93 levels. I then compared these spending amounts to the actual spending amounts in 1999-2000.

The results were informative. Education, transportation, government administration, and debt interest each had actual spending in 1999-2000 that was less than the spending they would have had if their share, or percentage, of gross state product remained at 1992-93 levels. Transportation was the biggest loser, spending $187 billion less, followed by government administration at $110 million less, education at $96 million less, and debt interest at $2 million less.

The “winners,” with actual 1999-2000 spending greater than the spending they would have had if their share of gross state product had remained at 1992-‘93 levels, were health care and welfare (plus $1.4 billion), environment (plus $265 million), and public safety (plus $52 million).

One use of these results is to pinpoint segments of government spending in North Carolina that have grown substantially faster than the overall economy. Some of this additional spending may have been by design. For example, the increased environmental and public-safety spending is probably a reflection of increased citizen concerns in these two areas.

The results clearly show that any effort to restrain the growth in state spending must address spending in health care and welfare. Spending in this category increased more than 40 percent faster than growth in the economy during the 1990s. Efforts to introduce automatic incentives for users to spend health care and welfare resources more frugally would be a good starting point.

Conversely, the finding that the share of the economy devoted to transportation spending fell in the 1990s is at least one explanation for the apparent increase in frustration with traffic congestion in the state. A larger economy creates more road travel, and the simple fact is that North Carolina’s spending on transportation has not kept pace with economic growth.

Step one in analyzing any issue is establishing the facts. The simple fact is that the share of North Carolina’s economy devoted to government increased in the 1990s. But equally important, there was also significant redistribution in the allocation of those resources across government functions during the decade.

Michael L. Walden is a William Neal Reynolds distinguished professor in the Department of Agricultural and Resource Economics at North Carolina State University and an adjunct scholar with the John Locke Foundation.