Economic Growth and the Public Sector: A Comparison of Canada and Italy, 1870-2013

Abstract

There is considerable evidence that the size of the public sector can influence an economy’s rate of economic growth. We investigate public sector spending of central governments and economic performance in two G7 countries over the long-term, Canada and Italy. Their economic performance has diverged in the last 25 years and it is worth investigating whether the size of government was a contributing factor. We find that in both the case of Canada and Italy the size of central government spending directly affects the performance of their economies in an inverse U-shaped relationship known as a Scully/BARS Curve. These results suggest that along with modifying current central government size, other levels of governments may need to shrink their own spending. The fact that the amount spent by government on pensions as a percentage of GDP in Italy is nearly 4 times that in Canada may partly explain the higher level of Italy’s public debt as well as an indirect contributing factor to economic stagnation in the last 25 years.