The impact of parties, economic growth, and public sector expansion: a comparison of long–term dynamics in the scandinavian and anglo–american democracies

Abstract

Abstract. This paper discusses (1) the extent to which the partisan composition of government affects economic policies and macroeconomic outcomes, and (2) the interrelationship between public spending, taxation and economic growth. These two issues are connected. Since target variables and instruments affect each other reciprocally, the specification of the partisan model should encompass both a reaction function and an outcome function. A pooled vector autoregressive model suggests that during the last century left–wing governments in the United States, Britain and Canada have reinforced the growth of both public spending and GNP. Only public sector expansion is affected by partisanship in Denmark, Norway and Sweden. In the Anglo–American countries changes in spending occur before changes in economic growth in terms of a lagged crowding out effect. Spending and revenues appear to affect each other reciprocally. By contrast, public sector expansion in Scandinavia stimulates growth, while taxation leads spending.