The Effect of Federal Government Size on Private Economic Performance in Canada: 1870–2011

This paper re-examines the relation between private economic performance and federal government size in Canada over the long 1870-2011 time period. The particular focus is on whether the effect of government size on private output has an inverted U shape with a tipping point. Its innovation is to use nonparametric techniques to assess whether the quadratic form most often employed is the appropriate parametric form for undertaking significance tests and whether that relationship is stable across the period. The empirical work does find a nonlinear relationship with a tipping point but finds the quadratic form applicable only to the early 1870-1936 time period. The latter period is more consistent with a linear form embodying a constant rather than increasing output cost to further increases in government size. The latter implies that policy based on the hypothesis that federal government size is currently excessive is premature.