Working Paper Series
No 858:
Government Size and Growth: A Survey and Interpretation of the Evidence
Andreas Bergh ()
and Magnus Henrekson ()
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; (follow links to similar papers)
JEL-Codes: E62; H11; H20; O23; O43; (follow links to similar papers)
24 pages, January 3, 2011
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- This paper is published as:
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Bergh, Andreas and Magnus Henrekson, (2011), 'Government Size and Growth: A Survey and Interpretation of the Evidence', Journal of Economic Surveys, Vol. 25, December, No. 5, pages 872-897
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