Does the size of the state hold back the economy?

LATER this week, the British government will announce its latest spending review. Its aim will be to balance the budget by 2020. In part, this is because the Conservative party genuinely believes a smaller state is good for economic growth in the long run. But is there a hard-and-fast relationship?

This is the kind of issue economists spend years researching. But your blogger pursued a simple approach; comparing the GDP per capita of OECD countries with government spending as a proportion of GDP. (Statistical purists should note; the latest figures on the fomer are from 2014 but the latter only go up to 2013.)

The OECD has data covering both measures for 26 countries. So step 1 was to rank the countries by government spending and then divide them into quartiles (six countries in the 1st and 4th quartiles, 7 countries in the 2nd and 3rd). The results were as follows

Quartile                                        GDP per capita ($)

Highest spenders                         40,285

2nd highest              ...Continue reading

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