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Government size and economic growth over 140 years: Evidence from a historical dataset

Author

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  • Carsten Colombier

    (FiFo - Institute for Public Economics, University of Cologne, Germany; Federal Department of Finance (Swiss Ministry of Finance), Bern, Switzerland)

Abstract

This paper contributes to the still unresolved issue of the growth impact of government size by analysing a historical panel data set of 17 developed countries, among them ten EU countries and the former EU member United Kingdom. The data ranges from 1880 to 2016. The unique feature of the long-time dimension allows for conducting a kind of natural experiment. Government size is closely related to economic-policy paradigms. The time span covers different economic policy paradigms, in particular, ‘laissez-faire’ before World War II and Keynesian economic policy after World War II. Before WW II government size is small, after WW II it big. Furthermore, this paper contributes to filling a gap in the literature by testing the non-linear hypothesis (Armey curve). We take particular attention to a key shortcoming of panel-data analysis – parameter or individual heterogeneity. Overall, this analysis suggests a systematic positive, albeit quite small, linear relationship of government size with economic growth. Rather than concentrating on government size, policy makers are advised to care for an efficiently run and high-quality government sector as a prerequisite for a steady growth path. This applies also to the reformed EU Stability and Growth Pact.

Suggested Citation

  • Carsten Colombier, 2026. "Government size and economic growth over 140 years: Evidence from a historical dataset," MENDELU Working Papers in Business and Economics 2026-112, Mendel University in Brno, Faculty of Business and Economics.
    • Handle: RePEc:men:wpaper:112_2026
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    Keywords

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    JEL classification:

    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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