Assessing the impact of government size on economic growth: a varying coefficient approach

Purpose This paper aims to investigate whether the effect of government consumption expenditure on economic growth is nonlinear and influenced by institutional and structural characteristics. Unlike most existing literature, which uses linear models, this study reexamines the relationship to determine if growth outcomes differ based on expenditure size, development level and institutional context. Design/methodology/approach The study analyzes data from 86 countries between 1980 and 2019, using linear, threshold and semiparametric panel data models to capture potential nonlinearities. Robustness checks include quadratic models, interactions with global crises, controls for financial development and different time aggregations. Findings The linear model indicates a statistically significant negative association between government consumption and economic growth. Threshold estimates identify a significant breakpoint at 10.26% of GDP, with positive growth effects below the threshold and negative, although statistically insignificant, effects above it. Semiparametric results show that the marginal effect of government consumption declines smoothly as its size increases and becomes negligible beyond a certain point, with substantial cross-country heterogeneity. Further analysis reveals that growth effects vary systematically with institutional quality, corruption and the sectoral composition of expenditure. Developed economies tend to experience negative returns to government consumption, while developing countries exhibit more moderate effects, often close to zero or weakly positive. Originality/value This study offers a flexible, multi-method assessment of the nonlinear relationship between government consumption and growth. By combining threshold and semiparametric methods and accounting for institutional differences, the study findings highlight the need to adapt fiscal policy to each country’s institutional capacity, development level and expenditure structure.