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<p>This paper examines whether government size and fiscal composition are associated with macroeconomic stability in the EU-27 over 1980–2024. We construct medium-run volatility measures for GDP growth and the output gap using five-year windows and relate them to aggregate and disaggregated fiscal variables. The baseline results suggest that fiscal composition matters more than overall size: indirect and capital taxes are associated with lower growth volatility, whereas direct taxes are associated with higher volatility. On the expenditure side, current expenditure, especially public wages and interest payments, is negatively associated with volatility. These patterns remain broadly intact across a range of robustness checks, with expenditure-side results proving particularly stable; revenue-side estimates become more conservative once common shocks are absorbed via the Augmented Mean Group estimator. We also report evidence on output losses during the Great Recession and the COVID-19 shock and relate them to pre-crisis fiscal conditions.</p>

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The stabilizing role of government scale: impacts on output volatility and economic losses

  • 期刊论文

  • 发表日期：

    2026年5月26日

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  • António Afonso,
  • José Alves,
  • Frederico Silva Leal

摘要

This paper examines whether government size and fiscal composition are associated with macroeconomic stability in the EU-27 over 1980–2024. We construct medium-run volatility measures for GDP growth and the output gap using five-year windows and relate them to aggregate and disaggregated fiscal variables. The baseline results suggest that fiscal composition matters more than overall size: indirect and capital taxes are associated with lower growth volatility, whereas direct taxes are associated with higher volatility. On the expenditure side, current expenditure, especially public wages and interest payments, is negatively associated with volatility. These patterns remain broadly intact across a range of robustness checks, with expenditure-side results proving particularly stable; revenue-side estimates become more conservative once common shocks are absorbed via the Augmented Mean Group estimator. We also report evidence on output losses during the Great Recession and the COVID-19 shock and relate them to pre-crisis fiscal conditions.