Defending spending cuts

If I wanted to defend public spending cuts, I’d use this new paper from Andreas Bergh and Magnus Henrekson. In a survey of the research, they find that big government does reduce long-run economic growth. In developed economies, if the share of public spending in GDP is 10 percentage points higher, annual GDP growth is 0.5-1.0 percentage points lower. This implies that the planned cut in government spending - from 47.5% of GDP in 2009-10 to 49.8% in 2015-16 - would, if it’s not reversed, make the median worker between £40 and £80 a week better off by 2035.You don’t have to believe that high taxes have big disincentive effects to think that big government reduces growth. I’d suggest two other mechanisms:1. A Baumol effect. Big government usually means that a lot of economic activity is concentrated in sectors where productivity grows slowly - such as education or healthcare. This drags down overall growth.2. Huge amounts of productivity growth come from exit and entry (pdf), rather than from existing organizations upping their game. The larger is government, the smaller is the sphere where this mechanism can work.The standard riposte to all this is usually: how is it then that Scandinavian countries have combined big governments with good macroeconomic performance?Bergh and Henrekson suggest a number of reasons. These economies tend to have very large exposure to international trade, and this encourages innovation, the division of labour and faster productivity growth. They are high-trust societies, which reduces the rent-seeking problems which often cause big government to reduce growth. And they score very highly on other measures of economic freedom. (This could be because of high trust: with people trusting companies to behave acceptably, demand for tight regulation is lower).None of this necessarily justifies big cuts in public spending here and now: this research is consistent with the possibility that public spending cuts reduce growth in the very short-run. Nor does it in any way justify deficit fetishism. And you might argue that, in a post-crisis economy in which firms are starved of finance, these crowding out effects of big government are smaller than they would be in normal times.Nevertheless, it does suggest that big government, in the long-run, is bad - albeit perhaps mildly so - for economic growth. Which is a little awkward for the statist left.