Economic growth and the size & structure of government: Implications for New Zealand

Abstract

The work of Gwartney, Holcombe and Lawson (GHL, 1998) has been cited in New Zealand to demonstrate that a larger government share of GDP is detrimental for economic growth. Their work is reassessed here. We find a number of omissions in their analysis that lead to a considerable over‐statement of the effect of government size on growth. More important for growth, according to other recent work, are the structures of government revenues and expenditures. The size and structure of New Zealand government flows are examined using recent IMF data. This analysis indicates that New Zealand has a relatively small government sector. However, the structures of both government revenues and expenditures warrant attention.

Notes

Arthur Grimes: Motu Research & Department of Economics, University of Waikato. Email: [email protected]. This paper was prepared as input for the Medium Term Strategy Group of the Ministry of Economic Development, but the paper in no way purports to represent MED views. Sole responsibility for the contents rests with the author. I wish to thank the editor of this journal and an anonymous referee, as well as MTSG members and participants at a New Zealand Treasury seminar, for extremely helpful comments on an earlier draft.