The relationship between government size and growth has received an enormous attention in the economics literature, and the recent financial crisis has forced this topic back on the agenda. A highly controversial debate in this respect is whether large governments are harmful for growth....

There is evidence that a budget consolidation strategy can work with only a small and short lived negative impact on growth. However, this time consolidation is taking place in the aftermath of a deep crisis which had lead to increased levels of uncertainty. In addition the financial sector, as...