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

Andreas Bergh and Magnus Henrekson ()

No 858, Working Paper Series from Research Institute of Industrial Economics

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: (i) that countries with higher social trust levels are able to develop larger government sectors without harming the economy, and (ii) that countries with large governments compensate for high taxes and spending by implementing market-friendly policies in other areas. Both explanations are supported by current research.

Keywords: Government size; Government expenditure; Economic growth; Economic freedom; Globalization; Taxation; Cross-country regressions (search for similar items in EconPapers)
JEL-codes: E62 H11 H20 O23 O43 (search for similar items in EconPapers)
Pages: 24 pages
Date: 2011-01-03
New Economics Papers: this item is included in nep-fdg, nep-mac and nep-pbe
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (135)

Published as Bergh, Andreas and Magnus Henrekson, 'Government Size and Growth: A Survey and Interpretation of the Evidence' in Journal of Economic Surveys, 2011, pages 872-897.

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Journal Article: GOVERNMENT SIZE AND GROWTH: A SURVEY AND INTERPRETATION OF THE EVIDENCE (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:iuiwop:0858

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