In the wake of the Global Financial Crisis of 2008/09, the juxtaposition of a "large" size of government (GS) and sluggish economic growth has become quite bleak in many countries. Tests of the impact of government size on economic growth with panel regression models suggested a strong negative impact and, although the BARS curve was confirmed for the whole group, the evidence was weak. The main economic reason for the continued concern with the size of government is the prevalence of negative correlation with economic growth found in empirical studies (Bergh and Henrekson, 2011).
The peak of the BARS curve identifies the size of government that maximizes growth or the optimal size of government. In linear regression growth models, the coefficient of the government size variable reflects the impact of government size on the growth rate of countries with growth rates similar to the sample mean. Therefore, a regression parameter of the amount of growth on government size estimates the impact of growth for a given amount of growth rate.
To control for the degree of common movement of the government size variable across countries, cross-country correlations were estimated. Before decomposing the government size time series, the effect of government size on economic growth in the dataset was checked. Each model was then augmented with the quadratic term of the government size variable to check for the existence of the BARS curve.
Country-specific OLS results and estimated government size breakpoints are reported in Table 3.
Quantile Regression Results
Of the 11 countries in the current study for which the government size-growth relationship was U-shaped, 8 of them (AUT, BEL, IRL, JPN, NLD, NOR, ESP and CHE) had period averages less than their turn estimated respective government size points. They can be said to be in the declining part of the parabola where increasing the size of government would moderate the negative impact until the size of government reaches the predicted tipping point. After that, further increases in the size of government are expected to have a positive impact on growth.
The remaining three countries with period averages higher than the breakpoint values (GER, Greece and USA) can be said to be on the rising segment of the parabola. In summary, the findings on the relationship between growth and country size for individual countries confirm a robust BARS curve for CAN, DNA, FIN, NZL and GBR, a significant U-shaped relationship for GER, GRC and CHE, and an insignificant relationship in other countries .10.
Government Size Time Series Decomposition Results
The relative importance of the permanent and transient components is determined by which accounts for most of the observed variance in the series (Murray and Papanyan, 2004). Estimated changes in HP trend and cycle components for the sampled countries are reported in Table 7. For all countries except Australia, the trend variance is several times larger than the cycle variance and therefore the trend accounts for more much variance in that observed series.
That is, most of the interesting dynamics of the government size series is captured by the trend component and the cycle is mostly noise. The permanence of change is strongest in Portugal, followed by Spain, Japan and Iceland; it is weakest in Luxembourg. To explain why changes in the size of government are largely permanent rather than transitory in nature, we need to look at the extent of regulation within the economy and the role of government in the provision of goods and services.
The OECD reports that, on average, governments contribute 70% and 85% of final consumption expenditure on health and education, respectively (OECD, 2011). Longer life expectancies and the approaching retirement of baby boomers mean that care for the elderly will become more important in health services. The finding or conclusion from the HP breakdown that changes in the size of government are predominantly permanent rather than transitory in nature warrants a distinction from Wagner's law of increasing government activity and the Peacock-Wiseman hypothesis (in public finance), both of which emphasize that public expenditure increases over time and with tends to increase with economic development (Singh, 2008).
Wagner's Law states that as countries industrialize, the share of the public sector in the national economy grows continuously for reasons such as the state's social functions that expand over time, administrative and protective functions, and welfare functions (Wagner. In a review of empirical evaluations of Wagner's Law, Durevall and Henrekson (2011) report that about 65% of studies find direct or indirect evidence in favor of the concept, while 35% do not support it. The simultaneous consideration of the BARS curve and Wagner's law leads to what Balatsky (2012) called the "paradox of wealth". .
Given the overwhelmingly democratic institutions in OECD countries, for example, such a displacement of the private sector by the public sector is unlikely to occur. In terms of spending on education, the OECD (2011) reports that most of the differences between countries lie in the extent to which the government finances pre-primary and tertiary education. For example, Korea's government spending on education as a percentage of GDP is one of the lowest in the OECD.
SUMMARY AND CONCLUSION
In health, reforms that could reduce the role of government include household co-payments for some services such as doctor visits, privatization of state-owned hospitals, and liberalization of the health insurance market. A check with a panel fixed effects model showed that economic growth is significantly negatively related to the size of government. Second, the introduction of the quadratic term for the government size variable revealed that the relationship has an inverted U shape for the entire sample, providing a basis for the estimation of a growth-maximizing size of government.
Checks of the data from the individual countries sampled yielded an almost equal mix of countries with U-shaped and inverted U-shaped relationships. This suggests that an increase in government size is not equally detrimental to economic growth for all countries. Fourth, the study decomposed the time series of government size of the countries in the sample into permanent/trend and temporary/cyclical components.
This was done in an attempt to determine whether shocks to government size are predominantly of the permanent type or of the transitory type. The trend component captures shocks that have a permanent effect on the level of the variable, and the cycle component captures shocks that have only a temporary effect on the level of the variable. For the entire sample and for 23 out of the 24 countries, it was estimated that the shocks to government size were more of the permanent type than the temporary type.
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