Afonso, AntónioAlves, JoséLeal, Frederico Silva2025-07-292025-07-292025-07António Afonso, José Alves e Frederico Silva Leal (2025). "Government scale as a stabilizer: effects on output volatility and losses ". REM Working paper series, nº 0385/2025http://hdl.handle.net/10400.5/102504We examine the impact of government size on economic fluctuations and the role of fiscal policy in promoting macroeconomic stability in the period 1980-2024. The results indicate that indirect taxes, capital taxes, and social security contributions (as a percentage of GDP) are associated with lower output volatility, whereas direct taxes tend to amplify it, particularly over longer horizons. On the expenditure side, current spending – especially public wages and interest payments – also exerts a stabilising influence. We further provide new estimates of output losses from the two most severe recent recessions in the EU27 – the Great Recession and the COVID-19 pandemic – and find evidence that the severity of these losses may be linked to the scale of the government, both before and after the crises.engGovernment sizeFiscal policyMacroeconomic stabilityOutput lossesworking paper