Government expenditure, taxes and economic growth
Naturally a bigger government is going to mean more ministries which need to be financed. This is going to lead to the expansion of the country fiscal policy.
Fiscal expansions sometimes have contractionary effects on the economy, and fiscal contractions may result in economic expansion. This is because of the effect of fiscal policy on business investment increases in public spending can hit company profits and thus lead to a reduction in private investment and economic growth. Cuts in public spending, on the other hand, can lead to more private investment, and faster growth.
Changes in public spending and taxation affect corporate profits, and thus private investment.. Changes in public spending have a bigger impact than tax changes do. Particularly important are changes in the public wage bill and in government transfers. This is because the labor market is the main channel linking these effects of fiscal policy on growth. Higher wages cut into profits, reducing investment, and as a result, economic growth.
Increases in public wages also can push up wage demands in the private sector, both in unionized and non-unionized labor markets. Increases in the number of public sector jobs lead to tighter labor market conditions and increased wage pressure. More generous government transfers to those who are out of work can also bid up private sector wages. The opposite holds for cuts in public wages and public employment.
Increases in taxes also reduce profits and investment, but the magnitude of these tax effects is smaller than those on the expenditure side. As with spending, it is the change of fiscal policy with regard to labor markets that has the strongest effect. On the tax side, workers in the private s ...