A number of cross-country comparisons do not find a robust negative relationship between government size and economic growth. In part this may reflect the prediction in economic theory that a negative relationship should exist primarily for rich countries with large public sectors. In this paper an econometric panel study is conducted on a sample of rich countries covering the 1970-95 period. Extended extreme bounds analyses are reported based on a regression model that tackles a number of econometric issues. Our general finding is that the more econometric problems are addressed, the more robust the relationship between government size and economic growth appears. Our most complete specifications are robust even according to the stringent extreme bounds criterion.JEL Classification: E62, H20, H50, O23, O40. * We are grateful for excellent research assistance from Per Thulin and for useful comments and suggestions from Ulf Jakobsson, Assar Lindbeck, Erik Mellander, Joakim Persson and two anonymous referees. Needless to say, the usual caveats apply.
In a recent review article Jonas Agell, Thomas Lindh and Henry Ohlsson (1997) claim that theoretical and empirical evidence does not allow any conclusion on whether there is a relationship between the rate of economic growth and the size of the public sector. They illustrate their conclusion with simple cross-country regressions where the relation between growth and public expenditure tilts from negative to positive when control variables are introduced. In our article we argue that Agell, Lindh and Ohlsson base their conclusion on empirical studies, and on their own regressions, without evaluating the econometric problems that arise. We extend Agell et al.´s review in order to highlight some of these problems. Furthermore, we present evidence showing that once a number of econometric issues are dealt with the relationship between growth and public expenditure may be more robustly negative than it first appears. JEL Classification: E62, H20, H50, O23, O40.
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AbstractIn spite of some cutbacks in entitlements, many welfare states' spending has continuously increased over the past decades, leading to larger tax burdens and often higher marginal tax rates. Proposals for reform often focus on reduced social insurance benefits and more actuarial insurance premia. In this paper it is shown that such reforms may have a smaller potential for reducing the marginal tax rate than commonly assumed, unless they are combined with mandatory personal savings accounts. Social insurance based on personal savings account is compared to other systems in a simple theoretical model and in a simulation within the context of Swedish social insurance. The simulation indicates that marginal tax effects can be reduced significantly by social insurance based on savings accounts without affecting life-time income distribution much.
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