Volume Nine, Number Four   September 2004    www.columbiajournal.ca

Does size matter? Study challenges belief that big government hurts economic growth

CPP News Service

Would cutting taxes even further boost Canada's economic performance? Would introducing a new social program like early childhood education and care hurt Canada's productivity? A new report from the Canadian Centre for Policy Alternatives reviews the evidence, finding no relationship between how big a government is and a country's economic performance.

"While most economists intuitively think that higher taxes should undermine economic performance, the evidence does not support such a view," said economist Marc Lee, author of Size of government and economic performance: What does the evidence say?

"The enemies of "big government" do so on ideological grounds, often backed by wealthy individuals who would stand to gain a lot by shrinking government. Economically, the key questions seem to be not how much tax is taken as a percent of GDP, but what tax mix is used, and what the money is spent on."

Lee finds that there is no basic correlation between indicators of economic performance (such as levels of GDP or GDP growth rates) and measures of government size (such as tax revenues as a share of GDP). A number of countries with the same income per person as Canada have larger government sectors, and some have smaller governments.

More detailed statistical tests uphold the result. There have been scores of studies on the determinants of economic growth. Combined, they do not lead to clear, unambiguous conclusions, much less a consensus about the role of government size on economic growth.

Lee notes that if "big government" led to weaker economic performance, countries like Norway, Sweden and Denmark, which have much larger governments than Canada, should all be economic basket cases. But this is not the case. These countries have among the highest productivity and standards of living in the world.

Lee concludes that there is no economic barrier to the expansion of public services in Canada. In fact, economic studies suggest programs like early childhood education and care would have positive economic impacts.

"What is refreshing about this research is that it reinforces the idea that public policy is about making choices," says Lee. "We can choose to engage in good social policy without fear that the economic sky will come falling down on us."