Fiscal Expansion, Government Size, and Long-Run Economic GroFiscal Expansion, Government Size, and Long-Run Economic Growth: Evidence from Economic Freedom and Institutional Qualitywth: Evidence from Economic Freedom and Institutional Quality

Abstract

Background: Fiscal expansion is widely used to stabilize economic activity during periods of uncertainty, yet its long-run relationship with economic growth remains debated, particularly regarding fiscal sustainability, allocative efficiency, and institutional effectiveness. Objective: This study examines the relationship between fiscal expansion, government size, economic freedom, institutional quality, and long-run economic growth within a cross-country macroeconomic framework. Methods: A quantitative approach was employed using an unbalanced panel dataset of 131 countries from 2019–2025, comprising up to 917 country-year observations. Data were obtained from the World Bank, the Heritage Foundation, and Transparency International. A Fixed Effects Model (FEM) was applied following the Hausman test (χ² = 47.32, p < 0.001), indicating that country-specific effects were correlated with the explanatory variables. Results: Business freedom (β = 0.0202–0.0251), fiscal freedom (β = 0.0141–0.0167), government size (β = 0.0094–0.0192), and institutional integrity (β = 0.0391–0.0453) positively and significantly affect GDP per capita (p < 0.01). Institutional integrity shows the strongest influence across model specifications. The findings also support Wagner’s Law, indicating a positive relationship between GDP per capita and government size. Conclusion: Fiscal expansion alone is insufficient to sustain long-run economic growth. Strong institutional quality, economic freedom, efficient public expenditure management, and effective regulation are essential for supporting sustainable economic development.