Government Spending

Government Shrinkage and Economic Growth


We examined the 28 OECD countries defined as "advanced" by the IMF between 1965 and 2010. Using regression analysis to control for the growth rates of the factors of production (physical capital, labor and human capital) and initial GDP, our results suggest that reducing the ratio of taxes or spending to GDP by five percentage points increases the growth rate of GDP per capita by 0.5 to 0.6 percentage points per year.

A broader sample of all "advanced" countries (again, as defined by the IMF) over the past 10 years seems to support these findings. Over this period, countries whose governments tax and spend less than 40% of GDP have grown more quickly than the big-government countries.

These differences in growth rates are important. Small differences in percentage growth rates roll up to huge differences in wealth generation over a number of years. If the differential of the last 10 years were to be constant over 25 years, then the economies of those countries with small governments would have more than doubled (an increase of 115%) while big government countries would have only seen growth of 64%.

Is this conclusive proof that cutting the size of government will always increase growth? Of course not. The accumulation and quality of other factors are also important. But this evidence shows that other things equal, countries with small governments and with small tax burdens grow faster.

That's from a WSJ op-ed by Tim Knox and Ryan Bourne of the Centre for Policy Studies, where a full-length version of their study is available. on government spending.

Another view on shrinkage, significant shrinkage:

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  1. When I want my GDP to grow I just show it pictures of Putin at the beach.

  2. Devil’s advocate: the USA is currently a small government by their measure so whackadoodles will argue that we can raise spending/taxes because we would still be in the small range.

    1. Even including state local spending?

    2. The US government is the biggest government in the world

  3. When less resources are stolen from the productive by govt slugs and pissed away there is more economic growth….and beavers eat wood, and the sky is blue…water wet….all that.

  4. I think for consistency’s sake, the same criticism I had for the RD spending regression applies here as well. There are a lot of reasons to question the causality of the above (even if generally I believe there is causality there). Reverse causation, third variables, that sort of thing also applies here.

  5. Gottaj ust luv them bought and paid for politicians.

  6. yeah, but the sample is 28 well developed countries. If you take the whole world into consideration, the data points are all over the map. China has fast growth, but probably equally heavy spending (though GDP might be outpacing spending increases) whereas somolia government doesn’t exist and spend money, but no one can claim much if any growth there.

  7. Actually, Somalia is doing better now than before the central government collapsed

  8. Not much of a study, still, I’m not surprised about the results.

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