Working Paper Series,
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

JEL-codes: E62; H11; H20; O23; O43

24 pages, January 3, 2011

Full text files

wp858.pdf  

Download statistics

Published as

Andreas Bergh and Magnus Henrekson, (2011), 'Government Size and Growth: A Survey and Interpretation of the Evidence', Journal of Economic Surveys, vol 25, no 5, pages 872-897

• Research Institute of Industrial Economics
• Ordering Working Papers
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Elisabeth Gustafsson ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:iuiwop:0858This page generated on 2024-09-13 22:15:49.