Big government is bad for economic growth. That's the finding of this new paper (pdf) from economists at the ECB.
The effect is large. Controlling for a few obvious things, they estimate that, within OECD countries a one percentage point rise in the share of government spending in GDP cuts growth by 0.13 percentage points a year. This implies that the rise in government spending we've had in the UK since 2000 (from 37.2% of GDP to 42%) would, if sustained take half a point off GDP growth, making us more than 5% worse off in 10 years' time than we would have been had spending stayed at 2000's levels.
The cross country growth equations that this finding is based upon are, of course, subject to many problems. Not least is omitted variables bias. Could it be that there's something that's correlated with big government which itself depresses subsequent growth?
However, the paper doesn't altogether uphold the orthodox neoliberal case for smaller government. It estimates that it is indirect taxes, and not income taxes, that depress growth most.
This implies that a a cut in excise duties and VAT and rise in income tax could actually increase growth. As indirect taxes are regressive, it would also increase equality.