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3.4  Summary

While cross-country correlations show a negative relationship between the size of government and economic growth, they do not imply causation, and econometric studies have struggled to find a robust relationship between levels of total expenditure or revenue and economic growth. However, this may be because these studies did not take account of the composition of expenditure and revenue and recent studies have found a positive impact of growth-enhancing expenditure and a negative impact of distortionary taxation. There is also a range of evidence of the negative impacts of taxes on factors such as investment and the size of the labour force, which affect growth, but that also emphasise that the tax structure matters. Therefore, the impact of the level of expenditure or revenue on economic growth is dependent on the mix of these fiscal variables. Studies suggest that the greatest economic benefits come from financing reductions in the most distortionary forms of taxation with cuts in expenditures that are unlikely to contribute to growth. However, there is still considerable uncertainty around what expenditures enable economic growth and as to the magnitude of the economic growth benefits from changes to the level and mix of expenditure or revenue.

Though there is an ongoing debate, more recent evidence on public versus private sector productivity supports the theory that the inherent nature of public goods and services means they are likely to have lower productivity growth than in some other sectors of the economy. There is also evidence, albeit mixed, that some forms of private sector provision are more efficient than public sector provision. Introducing contestability in service delivery can spur a step change in performance where the public sector is not operating at the efficiency frontier.

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