Government Size and Growth: A Survey and Interpretation of the Evidence

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract: The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach -of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time -reveals a more consistent picture: The most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate. We discuss efforts to make sense of this correlation, and note several pitfalls involved in giving it a causal interpretation. Against this background, we discuss two explanations of why several countries with high taxes seem able to enjoy above average growth: One hypothesis is that countries with higher social trust levels are able to develop larger government sectors without harming the economy. Another explanation is that countries with large governments compensate for high taxes and spending by implementing market-friendly policies in other areas. Both explanations are supported by ongoing research. Terms of use: Documents inJEL Classification: E62; H11; H20; O23; O43.

Fiscal policy and TFP in the OECD: measuring direct and indirect effects

“…Depending on methods used and on countries studied, the obtained results are highly contradictory. However, as pointed out by Bergh and Henrekson (2011), focusing on OECD countries and relying on panel data estimations reveals a more consistent picture. Correlation between government size and economic growth is negative and the sign seems not to be an unintended consequence of reverse causality.…”

The Effect of the Size and the Mix of Public Spending on Growth and Inequality

“…There is a vast empirical literature investigating the relationship between the size of the government and economic growth (see Slemrod, 1995;Myles 2009;Bergh and Henrekson, 2011 for overviews). A review by Bergh and Henrekson (2011), based on papers published in peer reviewed journals after 2000, suggested a negative relationship in OECD countries. Likewise, a recent OECD study confirmed a negative relationship between the size of government and GDP growth (Fall and Fournier, 2015).…”

Public Finance, Economic Growth and Inequality

“…At low levels of income, there is a positive association between government size and growth, if the government is successful in collecting taxes and providing the basic functions necessary for economic growth such as protecting property rights and enforcing the rule of law (Slemrod, 1995;Bergh and Henrekson, 2011). Moreover, when such a minimal government expands its activities to provide infrastructure, health care and education, the effect on growth is likely positive.…”

“…Recent studies, exploiting cross-country panel data and including a wider range of control variables, provide better insights on the link between the size of the government and growth. A review by Bergh and Henrekson (2011), based on papers published in peer reviewed journals after 2000, suggested a negative relationship in OECD countries. Likewise, a recent OECD study also found a negative relationship between the size of government and GDP growth in a sample of OECD countries (Fall and Fournier, 2015).…”