Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/81319
Authors: 
Bergh, Andreas
Henrekson, Magnus
Year of Publication: 
2011
Series/Report no.: 
IFN Working Paper 858
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.
Subjects: 
Government size
Government expenditure
Economic growth
Economic freedom
Globalization
Taxation
Cross-country regressions
JEL: 
E62
H11
H20
O23
O43
Document Type: 
Working Paper

Files in This Item:
File
Size
1.35 MB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.