In Iceland, which didnt throw taxpayer money at the banks, government spending was slashed from 57.6% of GDP in 2008 to 46.5% in 2012. The deficit fell from 12.9% of GDP to 3.4%. The economy began to recover in 2011.
Icelands economic boost from fiscal frugality was neither unorthodox nor unique. After all, the U.S. economy boomed in the late 1990s when federal spending was cut from 22.3% of GDP in 1991 to 18.2% in 2000. In Canada, total federal and provincial spending was deeply slashed from 53.2% of GDP in 1992 to 39.2% in 2007 with only salubrious effects.
That's a bit misleading as GDP growth accounts for all of the change not cuts. US spending actually increased almost 23% in the 6 years between 1995 (the GOP takeover of Congress) and 2001. Of course that looks great when compared to the Bush era when spending increased 23% in just the first 3 years.
It is so simple. A dollar in private hands growns. A dollar in government hands shrinks. So if the government share of an economy grows everyone gets poorer.