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In this paper, we use data from a corruption survey conducted among top politicians and high level civil servants in 290 Swedish municipalities in 2007 to investigate the effects of government size on corruption. We construct several measures of corruption based on the survey, and combine these corruption measures with detailed administrative municipality level data to estimate the effect of local government resources on corruption. In cross-sectional analysis, we find a robust and negative association between total public expenditure and corruption. When we use lagged population growth rates and age structure as instruments for expenditure in 2-stage-least-squares regressions, the point estimates remain negative, but are no longer significant. In contrast with standard political economy models, where a bigger public sector is typically assumed to cause problems with corruption and public office abuse, our results suggest that corruption pressures may be particularly high when government resources are limited.

In a recent paper, Colombier (2009) uses a robust estimation technique and claims to find empirical evidence that government size has not been detrimental to growth for OECD countries during the 1970 to 2001 period, and that endogenous growth theory is not corroborated. We examine the robustness of these findings, and show that Colombier’s results differ from those in other recent papers not because of the estimator used, but because of the exclusion of other control variables. Adding time fixed effects to Colombier’s data set, and using the same econometric method, we obtain results in line with other findings, corroborating endogenous growth theory. Adding further control variables illustrates the robustness of the negative correlation between total tax revenue and economic growth for both instrumented and non-instrumented regressions.

The literature on the relationship between the size of government and economic growth is full of seemingly contradictory findings. This conflict is largely explained by variations in definitions and the countries studied. An alternative approach—of limiting the focus to studies of the relationship in rich countries, measuring government size as total taxes or total expenditure relative to GDP and relying on panel data estimations with variation over time—reveals a more consistent picture. The most recent studies find a significant negative correlation: An increase in government size by 10 percentage points is associated with a 0.5 to 1 percent lower annual growth rate. We discuss efforts to make sense of this correlation, and note several pitfalls involved in giving it a causal interpretation. Against this background, we discuss two explanations of why several countries with high taxes seem able to enjoy above average growth: (i) that countries with higher social trust levels are able to develop larger government sectors without harming the economy, and (ii) that countries with large governments compensate for high taxes and spending by implementing market-friendly policies in other areas. Both explanations are supported by current research.