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Explaining the growth of government in Sweden: A disequilibrium approach

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  • Magnus Henrekson
  • Johan Lybeck

Abstract

Previous studies aimed at explaining the growth of government in a particular country have failed to distinguish between explanatory variables acting on the supply and demand side, respectively. Alternatively, they have tested one explanation at a time, implying explanatory equations that are misspecified. In addition, no allowance has been made for the fact that the interaction between supply and demand can hardly be assumed to be a self-equilibrating process, where the price of public goods and services adjusts to equate the two. Instead, a framework of disequilibrium seems more appropriate for the analysis of the growth of government. In this study we have identified a number of variables potentially important for the explanation of the growth of government. Each variable was either classified to pertain to the supply or demand side. In the empirical estimations we applied a disequilibrium maximum likelihood method, capable of accounting for the fact that we cannot expect the market for public goods to clear in each period. This method has the further advantage that we are not required to specify a priori whether we are in the supply or demand regime. Concerning the results, our regressions point to the importance of fiscal illusion, notably illusion resulting from an underbalanced budget, and bureaucratic pressure for a larger public sector as the two most important determinants behind the observed growth. A high demand for income redistribution is also found to be an important factor, especially behind the growth of transfers. Furthermore, Baumol's Disease in combination with a low price elasticity of demand seems to contribute strongly to the growth of government consumption. Finally, there is a tendency for coalition governments to let the public sector grow faster than does a one-party government. Copyright Kluwer Academic Publishers 1988

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  • Magnus Henrekson & Johan Lybeck, 1988. "Explaining the growth of government in Sweden: A disequilibrium approach," Public Choice, Springer, vol. 57(3), pages 213-232, June.
    • Handle: RePEc:kap:pubcho:v:57:y:1988:i:3:p:213-232
    DOI: 10.1007/BF00124806
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    9. Sturm, Jan-Egbert, 2001. "Determinants of public capital spending in less-developed countries," CCSO Working Papers 200107, University of Groningen, CCSO Centre for Economic Research.
    10. Steven Gordon & John Garen & J. R. Clark, 2019. "The growth of government, trust in government, and evidence on their coevolution," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(3), pages 456-480, July.
    11. François Facchini & Mickael Melki & Andrew Pickering, 2017. "Labour Costs and the Size of Government," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 79(2), pages 251-275, April.
    12. Mateescu, Dan, 2016. "The Linear Regression Of Weighted Segments," Working Papers of Institute for Economic Forecasting 160720, Institute for Economic Forecasting.
    13. Manuel Ja n-Garc a, 2017. "A Demand Determinants Model for Public Spending in Spain," International Journal of Economics and Financial Issues, Econjournals, vol. 7(4), pages 372-386.
    14. Abbott, Andrew & Jones, Philip, 2021. "Government response to increased demand for public services: The cyclicality of government health expenditures in the OECD," European Journal of Political Economy, Elsevier, vol. 68(C).
    15. Taeseop Yoon & Junseop Shim, 2016. "An empirical analysis of the fiscal impacts of changes in tax revenue multiplicity: Focusing on Florida county case," International Review of Public Administration, Taylor & Francis Journals, vol. 21(1), pages 21-36, January.
    16. Sanandaji, Tino & Wallace, Björn, 2010. "Fiscal Illusion and Fiscal Obfuscation:An Empirical Study of Tax Perception in Sweden," Working Paper Series 837, Research Institute of Industrial Economics.
    17. Jan-Egbert Sturm & Jakob De Haan, 1998. "Public capital spending in The Netherlands: developments and explanations," Applied Economics Letters, Taylor & Francis Journals, vol. 5(1), pages 5-10.
    18. Paul R. Blackley, 2003. "Price versus Income Effects as Sources of Growth in Government's Share of GDP," Public Finance Review, , vol. 31(3), pages 241-262, May.
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    20. Hammed Amusa & Ramos Mabugu & Robert Mabunda, 2008. "Fiscal Illusion at the Local Sphere: An Empirical Test of the Flypaper Effect using South African Municipal Data," Working Papers 072, Economic Research Southern Africa.
    21. Ian Webster, 2018. "The Public Works Loan Board and the growth of the state in nineteenth‐century England," Economic History Review, Economic History Society, vol. 71(3), pages 887-908, August.
    22. Ignacio Lago-Peñas & Santiago Lago-Peñas, 2009. "Does the nationalization of party systems affect the composition of public spending?," Economics of Governance, Springer, vol. 10(1), pages 85-98, January.
    23. Facchini, Francois, 2014. "The determinants of public spending: a survey in a methodological perspective," MPRA Paper 53006, University Library of Munich, Germany.
    24. Bruno Théret, 1995. "Régulation du déficit budgétaire et croissance des dépenses de l'Etat en France de 1815 à 1939. Une modélisation économétrique simple des régimes fisco-financiers libéraux," Revue Économique, Programme National Persée, vol. 46(1), pages 57-90.

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