Government size and economic growth in Italy: an empirical analyses based on new data (1861-2008)

The aim of this paper is to empirically assess the relationship between government size and economic growth. Using time series methodologies applied to annual data for Italy, the effect public expenditure, unemployment and fiscal reforms on economic activity have been analysed. The data used in these analyses have been collected and shown in Forte (2011), and they cover the very long-period 1861-2011. Our results show the presence of a non-linear relationship between the size of public sector (measured by the share of government expenditure over GDP) and the economic growth rate for Italy. In general, the presence of an inverted “U-shape” curve emerges for the last two decades, suggesting that expenditure cuts might faster GDP dynamic. This result is in line with recent empirical literature about this issue. Interestingly, for the monarchic years, it has been found that the zero budget constraint provoked a slower aggregate income variation.