The Optimal Size of Government and the Armey Curve: A Review of Empirical Evidence

The objective of this study is to examine the “inverted U” relationship between public spending and economic growth known as the Armey curve, and to review the empirical evidence on the optimal level of public spending required, by country, to maximize gross domestic product (GDP), based on regression methods and the Armey curve. The Armey curve denotes a positive relationship between public spending and GDP up to a maximum point thereafter the relationship becomes negative: that is, public spending is productive only to a certain extent, after which it becomes unproductive. The empirical findings show the inverted U-shape between public spending and growth, and therefore whether government spending is of an optimal size. World Bank data on public spending (as a percentage of GDP) and GDP per capita in US$ purchasing power parity (PPP) for 2017 identifies countries with low public spending and high GDP per capita, such as the Special Administrative Region of Macao, China. Moreover, the studies reviewed show that current public spending and/or average public spending across different countries is above or below the threshold public spending level. Among the policy implications, it is suggested that countries below the threshold inject public spending into investments that generate a greater impact on the economy. The management of public spending to achieve the optimal government size should ensure long-term sustainable economic growth for the countries of the world.