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Government Scale as a Stabilizer: Effects on Output Volatility and Losses

Author

Listed:
  • António Afonso
  • José Alves
  • Frederico Silva Leal

Abstract

We examine the impact of government size on economic fluctuations and the role of fiscal policy in promoting macroeconomic stability in the period 1980-2024. The results indicate that indirect taxes, capital taxes, and social security contributions (as a percentage of GDP) are associated with lower output volatility, whereas direct taxes tend to amplify it, particularly over longer horizons. On the expenditure side, current spending – especially public wages and interest payments – also exerts a stabilising influence. We further provide new estimates of output losses from the two most severe recent recessions in the EU27 – the Great Recession and the COVID-19 pandemic – and find evidence that the severity of these losses may be linked to the scale of the government, both before and after the crises.

Suggested Citation

  • António Afonso & José Alves & Frederico Silva Leal, 2025. "Government Scale as a Stabilizer: Effects on Output Volatility and Losses," Working Papers REM 2025/0385, ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa.
    • Handle: RePEc:ise:remwps:wp03852025
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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