A limited government is a small government that allows private citizens, not rulers or politicians, to make most of the decisions. Countries with limited governments have fewer laws about what individuals and businesses can and can’t do. Since limited governments require fewer people to create and enforce rules, they don’t need as much money to operate, so taxes are lower. This article will explain what limited government is and how it affects a country’s economy and finances, with specific countries as examples.

How Does Limited Government Affect a Country’s Economy and Finances?

Everything government does is paid for with taxpayer dollars. As a result, a limited government tends to impose a relatively low tax burden on businesses and individuals. With lower taxes, households and businesses have more disposable income to spend, save and invest, which helps the economy grow. While a limited government may provide fewer services, that doesn’t mean services typically provided by governments, like roads, can’t exist; if there is a demand for them, the private sector will provide them instead. A truly limited government provides a bare minimum of public services, such as national defense, but does not, for example, pay for higher education. A limited government’s main purpose is to protect people and their property.

Limited government means there are fewer rules that must be followed and enforced. The resources that would otherwise be devoted to complying with regulations can be dedicated instead to more productive uses or to leisure time. Ultimately, limited government is about having more individual freedom and the right to do what you want, as long as you don’t infringe on anyone else’s rights.

Ranking Limited Government and Economic Freedom

The Fraser Institute, an independent, nonpartisan research and educational organization based in Canada, has been studying the economic freedom of countries around the world since 1996. Since then, it has produced annual updates on how investment, economic growth, income levels and poverty rates affect economic freedom. Economic freedom drives prosperity, improves health and education, lets people make their own decisions and protects private property.

The Fraser Institute measures limited government by the size of government (top marginal tax rates, government spending and other factors), the legal system (protection of property rights, judicial independence and other factors), sound money (inflation and other factors), freedom to trade internationally (tariffs, trade barriers and other factors) and regulation of credit markets, labor markets and businesses. The following rankings of the countries with the most limited and the most controlling governments come from the Fraser Institute’s 2014 Economic Freedom of the World Index (“Fraser Index”). which analyzes 152 countries and territories. Figures on tax rates and government spending come from a similar study, produced by The Wall Street Journal and Washington, D.C.-based think tank The Heritage Foundation, called the 2014 Index of Economic Freedom (“Heritage Index”). Eight of the nine countries mentioned in this article rank similarly in the two studies in terms of economic freedom.

Countries with Limited Governments

Hong Kong

Hong Kong is technically a special administrative region of China, not a country, but it has its own government and a capitalist economy. Hong Kong ranks first in the Fraser Index for having the most limited government and the most economic freedom. It also ranks highly in the areas of property rights, the legal system, free trade and regulation, though its monetary system has some room for improvement.

Limited government is arguably one of the reasons why Hong Kong, along with Singapore, South Korea and Taiwan, is considered one of the four Asian tigers. countries that have experienced strong and rapid economic growth since the 1960s. Hong Kong’s freedom to trade internationally, as measured by factors including low tariffs and low restrictions on foreign ownership and investment, along with its limited regulation of credit markets, labor markets and business, make it an exemplar for other countries.

Hong Kong is a major international financial center. is home to one of the world’s largest stock exchanges and has low tax rates. The individual income tax rate is 15%, while the highest corporate rate is 16.5%. Government spending is about 20% of GDP, and the government has a budget surplus and little to no debt. Hong Kong’s gross national income per capita in 2013 was more than $54,000, almost five times what those in mainland China earned.

Madagascar

Madagascar has the second smallest government of the countries in the Fraser Index but comes in 101st in economic freedom thanks to low ratings in all other areas of economic freedom. Its performance is relatively high among African countries, but corruption is widespread, inflation is high, and contracts can be difficult to enforce, among other significant problems. Income taxes are relatively low, with a top rate of 20% for both individuals and corporations, and government spending is just 16% of GDP. The country has no stock market and per capita income is about $1,300 a year. Despite how poorly it ranks, it has improved over the last two decades.

Bangladesh

Despite having the third smallest government in the Fraser Index, Bangladesh comes in 119th in economic freedom thanks to poor ratings for its legal system, monetary system, trade freedom and regulatory climate. It has weak property rights and a bribery problem, and government price controls hamper economic activity. Despite its pitiful per capita income of about $2,800 annually and attendant widespread poverty, Bangladesh is considered a frontier market because of its steady economic growth averaging 6% per year. Government spending is just 16% of GDP, but the individual income tax rate is 25% and the corporate rate is 45%.

Honduras

Coming in fourth in terms of smallest governments, Honduras is this article’s one exception in the similarities between the economic freedom studies’ rankings: the Fraser Index ranks Honduras 55th out of 152, while the Heritage Index ranks it 112th out of 178. Relatively sound money and free trade bolster the country’s low ratings for regulation and especially for its legal system, which comes in at 137 out of 152. Government spending is about 25% of GDP, while government debt is about 35% of GDP. The highest individual and corporate tax brackets are 25%.

Honduras has major problems with crime and poverty, and per capita income is around $4,300 per year. However, an interesting development could bolster the country’s rankings significantly. Honduras is considering implementing a unique governance structure called zonas de empleo y desarollo económico (zones for employment and economic development, or ZEDEs). These autonomous regions, also called start-up cities, would be allowed to create their own economic, legal and administrative systems, separate from those of Honduras.

Countries with Very Large Governments

Algeria

Algeria has the largest government of all the countries studied, coming in at 152nd in government size. Algeria also ranks near the bottom of the economic freedom list, at 148. Algeria has been a major oil-producing nation. but depleted reserves, threats to personal safety from militants, and corruption within the country’s national oil and natural gas company, Sonatrach, have prevented the nation from realizing its full potential.

In addition to having the largest government of all the countries studied, Algeria’s legal system, monetary system, trade freedom and regulatory climate rank poorly. The economy has a large informal sector, with about half of transactions taking place in the black market. Despite its poor rankings, the average per capita income was almost $13,000 in 2013. The highest individual income tax bracket is 35%, government spending is 40% of GDP, and government debt is 10% of GDP.

The Netherlands

Despite having the second-largest government in the Fraser Index, the Netherlands ranks 34th in economic freedom thanks to its highly ranked legal system, monetary system and trade freedom. The Dutch enjoy a per capita gross national income of about $43,000. However, the Netherlands has struggled with the size of its national debt, which has climbed above 70% of GDP in recent years, despite having a top individual income tax rate of 52%.

Sweden

Sweden wins third prize in the big government category, but ranks 32nd in economic freedom and ranks highly in all other areas of economic freedom. It is one of the most highly taxed countries in the world, with a top individual income tax rate of 57%, and government spending accounts for about half of GDP. Indeed, Sweden is well known for its massive welfare state; the government, financed by taxpayers, provides Swedes with numerous benefits, including retirement pensions, sick leave, parental leave, universal health care and childcare, and education through the college level. The high levels of government spending required to maintain these services may not be sustainable long term, but many scholars consider the Nordic model of free market capitalism and social benefits an ideal system. Swedes enjoy a per capita income of about $45,000 per year.

Belgium

Coming in with the fourth-largest government in the Fraser Index, Belgium still manages to rank 53rd in economic freedom because its legal system, monetary system, trade freedom and regulatory climate rank highly. Similar to Sweden and the Netherlands, Belgium is one of the highest-taxed countries in the world. with a top individual income tax rate of 50%, and government spending exceeds 50% of GDP. The country also struggles with a massive national debt that exceeds 90% of GDP. Belgium, like Sweden, provides generous benefits to its residents. Annual per capita income is a little over $40,000.

What about the United States?

The United States ranks 62nd out of 152 for its size of government, but ranks 12th in overall economic freedom, significantly lower than its third-place ranking throughout much of the 1980–2000 period. The United States ranks 21st in regulation, 28th for its legal system and property rights, 40th for international trade freedom and 41st for sound money, leaving plenty of room for improvement. Measures of property rights and corruption have suffered in recent years under high levels of government regulation, and the United States has the highest corporate tax rate in the developed world. at 35%. Public debt, at more than 100% of GDP, is a major problem, and government spending exceeds 40% of GDP. Gross national income per capita was nearly $54,000 in 2013, on par with Hong Kong.

Limited government is what the United States’ founding fathers — George Washington, James Madison, Benjamin Franklin, Alexander Hamilton, and the other men who helped form the United States — had in mind when they wrote the Constitution and created a government based on enumerated and delegated powers. The U.S. government is only supposed to exercise the specifically named powers that the Constitution assigns to it. As its middling ranking for government size shows, the United States today has strayed from the limited government ideal that the founding fathers envisioned.

The Bottom Line

Honduras, Bangladesh and Madagascar demonstrate that limited government isn’t always synonymous with economic freedom and prosperity. According to the Fraser Index, countries can’t thrive without rule of law, property rights, sound money, free trade and other major contributors to economic freedom. Conversely, as the Netherlands and Sweden show, countries with large governments can still prosper if these other components are strong.

Limited government is an important component of economic freedom, and higher levels of economic freedom are associated with higher annual incomes, better health, longer life expectancies and greater political and civil liberties. A large government alone doesn’t doom a country’s residents to miserable lives, nor does a limited government mean a country’s residents are well off. However, limited government is a key factor in the happiness, health and prosperity of a country’s people.