Government Size, Government Debt and Economic Performance with Particular Application to New Zealand

This analysis finds that long‐run government size and private per capita output have an inverted U‐shaped relationship, with the positive effect of government size peaking at close to 30 per cent of GDP . As larger debt is also associated with lower levels of private output, the recent policy of contraction in government size and debt in New Zealand has produced an output premium. The short‐run analysis suggests that the inverse relationship found between changes in government size and economic growth is attributable to counter‐cyclical fiscal policy. This reinforces the traditional role of fiscal policy in New Zealand while cautioning against longer‐run spillovers from larger government size and debt.