Government Scale as a Stabilizer: Effects on Output Volatility and Losses

Antonio Afonso, José Alves and Frederico Silva Leal

No 2025/0385, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: We examine the impact of government size on economic fluctuations and the role of fiscal policy in promoting macroeconomic stability in the period 1980-2024. The results indicate that indirect taxes, capital taxes, and social security contributions (as a percentage of GDP) are associated with lower output volatility, whereas direct taxes tend to amplify it, particularly over longer horizons. On the expenditure side, current spending – especially public wages and interest payments – also exerts a stabilising influence. We further provide new estimates of output losses from the two most severe recent recessions in the EU27 – the Great Recession and the COVID-19 pandemic – and find evidence that the severity of these losses may be linked to the scale of the government, both before and after the crises.

Keywords: Government size; Fiscal policy, Macroeconomic stability; Output losses. (search for similar items in EconPapers)
JEL-codes: E32 E62 H20 (search for similar items in EconPapers)
Date: 2025-07
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