The public sector is the portion of an economy that is owned, funded or controlled by government. It includes national, regional and local governments, the agencies and services they run, such as schools, hospitals, police, courts and the armed forces, social security funds, and public corporations or state-owned enterprises that sell goods and services, such as national railways, postal services, utilities and state banks. Everything outside it, including households, privately owned businesses and most non-profit organizations, makes up the private sector.
The balance between the two sectors is one of the main ways economies differ. Countries described as having a mixed economy combine a large private sector with substantial public provision; under state capitalism the state also owns many leading firms; and in classic socialist or communist systems the public sector dominates production.
The public sector in plain terms
Think of an apartment building. Each family pays for its own furniture and food, but the residents also pay a shared service charge that covers the lift, the lighting in the stairwell, the security guard and the roof. Those shared things are run by the building's committee, not by any one family.
The public sector is that committee and the services it runs, on the scale of a whole country. People pay for it mainly through taxes, and in return get things that are shared, such as roads, courts and defence, or things society has decided everyone should have, such as basic schooling.
How the public sector is defined and measured
International statistical standards, including the UN System of National Accounts and the IMF's Government Finance Statistics Manual, divide the public sector into two parts. General government covers central, state and local government units and social security funds, which mainly provide non-market services financed by taxes. Public corporations are businesses controlled by government that charge market prices, including public banks and, in some definitions, the central bank. Statisticians use these boundaries to compile figures on government spending, deficits and national debt.
Size across countries
According to the OECD's Government at a Glance 2025, general government spending averaged about 42.6% of GDP across OECD countries in 2023, down from a pandemic peak of 48.3% in 2020. EU members of the OECD averaged 49.3% in 2024, with Finland, France and Austria near the top. General government employment averaged 18.4% of total employment across the OECD in 2023, ranging from about 30% in Norway to below 10% in Japan and South Korea. Many developing countries have smaller tax-funded governments but large state-owned enterprises in energy, transport and banking. China's state-owned enterprises remain dominant in finance, energy and telecommunications, while Gulf economies channel resource revenue through state companies and sovereign wealth funds.
Public sector accounts and accountability
Because definitions differ, headline numbers can vary for the same country. The United Kingdom's Office for National Statistics, for example, publishes public sector net debt with and without the Bank of England, and the United States reports federal, state and local finances separately. Fiscal rules in many countries, such as the EU's deficit and debt limits, are written in terms of general government. Public bodies are held to account through budgets voted by parliament, audit offices and published accounts, and many governments now report balance sheets that include assets such as land and buildings as well as liabilities such as pension promises.
Functions and funding
- Providing public goods. Defence, law and order, and basic research, which markets tend to under-supply because people cannot easily be charged for them.
- Delivering services. Education, health care, and infrastructure such as roads, water and power, either directly or through contracts and public-private partnerships.
- Redistribution. Pensions, unemployment pay and other transfer payments and welfare programmes.
- Stabilization and regulation. Using fiscal policy to smooth the business cycle and setting the rules within which private markets operate.
The public sector is funded mainly by taxes, social contributions and fees, with the gap covered by government borrowing. State-owned firms may also earn their own revenue and pay dividends to the treasury.
Debates about its role
How large the public sector should be is among the oldest questions in economics. Keynesian and social-democratic traditions argue that a substantial public sector corrects market failures, reduces inequality and stabilizes demand. Critics in free-market and public choice traditions argue that public bodies lack the profit motive and competition that push private firms to cut costs, are open to political interference and capture, and may crowd out private investment. These debates have driven waves of privatization since the 1980s, notably in the United Kingdom and later in Eastern Europe and Latin America, and also periods of nationalization, such as the bank rescues of the 2008 financial crisis. Measuring public-sector productivity is difficult, because many outputs, such as better health or safer streets, have no market price.