Growth effects of government expenditure and taxation in rich countries

Abstract

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.

Decomposition of the effect of government size on growth

“…If resources were allocated less efficiently by larger governments, economic growth would be hindered. This conjecture is supported by several existing works (e.g., Landau, 1985;Peden & Bradley, 1989;Fölster & Herekson, 2001). On the other hand, some studies do not find an obvious association between government size and economic growth (e.g., Ram, 1986;Bairam, 1990;Easterly and Rebelo, 1993;Mendoza et al, 1997).…”

Estimating the Impact of Taxes on the Economic Growth in the United States

“…There are many studies that have examined the effect of taxes on economic growth (Helms, 1985;Myles, 2000;Folster and Henrekson, 2001;Lee and Gordon, 2005;Tosun and Abizadeh, 2005;Bania et al 2007;Furceri and Karras, 2007;Reed, 2008;Romer and Romer, 2010;Gemmel et al 2011;Arnold et al 2011;Barro and Redlick, 2011;Ferede and Dahlby, 2012;Mertens and Ravn, 2013;Saqib et al 2014;Gale et al 2015;Ojong et al 2016). Engen and Skinner (1996) found that 2.5% point increase in tax to GDP ratio decreases GDP growth by 0.2-0.3%.…”

Distributional Effects of Growth and Public Expenditures in Africa: Estimates for Tanzania and Rwanda

“…Thus, for instance, some of those studies have found that aggregate public spending is associated negatively with economic growth [Landau (1986); Levine and Renelt (1992); Folster et al (2001); Schaltegger and Torgler (2004)], while others have found the opposite relationship [Ram (1986);Sattar (1993); Bose, Haque and Osborn (2003)]. Even, the neutrality of public expenditure on economic growth is claimed [Kormendi and Maguire (1985)].…”

“…al. (2003); Folster and Henrekson (2001); Schaltegger and Torgler (2004)]; nuanced, in that depending on the types of expenditures analyzed the results point to different levels of inefficiency. The case for developing countries might be much different.…”