I feel the liberaltarianism discussion is often muddled because of confusion over a number of different ideas. I'm going to try to clear my own head here. Maybe it will be useful to others.
I think it's important to distinguish “small government” from “limited government,” and to distinguish between a couple different senses of “limited.”
Let's say government is small when government spending as a percentage of national economic output is relatively low. Small government, in this sense, will tend to have relatively low taxes. But the overall tax take tells us little about how the tax burden is distributed. It doesn't tell us what the money is spent on. And it doesn't tell us much about economic liberty.
Which society is freer? One with a smaller government where the very rich pay all the taxes (90 percent of the population pays no taxes! 90 percent libertopia?) or one with a slightly larger government with a relatively low level of taxation spread more or less evenly over the whole population? (Should we do a poll on this?)
The fact that a government is small doesn't rule out the possibility of egregious restrictions on non-economic liberties or of incredibly burdensome economic regulation. Suppose it takes two years to fill out all the paperwork, get all the licenses, etc. to start a small business, but once you do that, your profits aren't taxed all. Suppose many forms of exchange are simply prohibited. You might have small government, low taxes, and very little economic freedom. Of course, a small government can ban abortion, prostitution, drugs, a free press, etc. just as well as a big one. Such a government may need to spend a lot of its modest budget on police and prisons instead of on genuine public goods. The size of the budget as as percentage of output doesn't tell you anything about the composition of spending. This is a really important point. The United States spends a lot on prisons, the military, drug law enforcement, border patrol, etc. A lot of this is the opposite of rights-respecting, and a lot of it is downright wasteful. The composition of spending is important both as a matter or morality and a matter of economic growth (which I happen to think is also a matter of morality.) Which is all to say, the fact that a government is small logically implies almost nothing about either liberty, justice or efficiency.
(Also, as a technical tangent, there may be economies of scale in the provision of certain public goods. So a smaller country whose government provides precisely the same goods as a bigger country may turn out to have a bigger government, simply because it costs them a little more to provide the goods. Slightly weaker economic performance relative to the bigger country may result, but a cutback in spending on those goods won't improve performance if they are growth-enabling.)
Limited government is really what matters, but “limited” is also a bit ambiguous. The most important sense is “rights-respecting.” Bills of rights are meant to declare that legitimate (and legal) government is limited to activities that do not violate rights. Many disputes between classical and modern liberals turn on their theories of rights. For example, if the collective action problems inherent in the provision of certain public goods justifies taxation, then a state that collects taxes for this purpose does not violate property rights. If you think there is no such justification for taxation, you'll tend to see the taxing state as violating rights and thus overstepping its proper limits. If you think there is such a justification for taxation, and believe there is an abundance of collective action problems that may be resolved only by government action, then you may think that a quite high level of taxation and government spending is perfectly consonant with limited, property-rights respecting government.
Here's an aside about libertarian theory that I think helps transition to another, related, idea of “limited.” Though most libertarians are not anarchists, the outsized influence of property-rights-focused anarchists within the broader libertarian community somehow seems to create a lot of confusion, when it ought to help clarify the issue. The so-called “minarchist” or “minimal government” view accepts the public goods justification of the state, while the anarchist rejects it. The anarchist argues either (1) that the protection of rights is an individual good and that individuals can successfully protect their rights by going to the market and contracting with private rights-protection agencies or (2) all public goods, including the protection of rights, can be successfully provided using markets and other forms of voluntary association. Anarchists often argue that if the public goods argument for state protection of rights (and the system of public finance it implies) is sound, then there is no principled basis for stopping at “minimal” government. The scope of legitimate government will be however wide the logic of the public goods or market failure argument happens to take you. There are a number of possible minarchist replies here (the specialness of the use of coercion in the rights protection business, etc.), but I basically think the anarchist critique is correct. If there is something especially unstable in private markets for rights protection, and that fact justifies public provision of that service, then there might be other kinds of market failures that justify the public provision of those markets' services.
I think this takes us to another sense of “limited government” as “limited to what non-government alternatives cannot do better.” An obvious implication of market failure arguments for state provision of certain services is that the state should not be in the business of providing services where markets or other voluntary mechanisms are superior. There's no justification for the coercive tax-financing of state enterprises when those goods and services would be provided (usually with higher quality and a lower price) with no state coercion. Also, state enterprises will tend to crowd out private enterprises both by (a) absorbing capital and using it badly and (b) by virtue of its inherent advantages in securing anti-competitive subsidies and barriers to entry, which is all the more reason to limit government to the things we actually need it for.
Let me wrap it up. The “size” of government is not a good proxy for either economic or non-economic liberty or for economic performance. Advocates of “small government” need to worry more than they do about the moral and economic dimensions of the composition of spending, and they need to realize that they care more than they think they do about questions of “distributive justice,” which is pretty obviously manifest in enthusiasm for reforms, like the “flat” and “fair” tax.
I think our real concern ought to be limited government. But whether you think an ideally limited government is also small will depends on lots of things including your account of rights, your beliefs about the relative efficiency and reliability of state vs. market provision of various goods, your beliefs about the necessity of public spending to facilitate growth, and more. The claim behind my version of “liberaltarianism” is that there is a principled position between classic night-watchman “minarchism” and full-on modern liberalism. If you're not an anarchist or totalitarian, then you think that it's possible for the state to do either too little or too much. Minarchist libertarians seem to be a bit embarrassed by the concessions they do make on the way to arguing for a state, and so stick as close as they can to their anarchists friends without going all the way stateless. But the anarchists are right that the minarchists have, in some sense already “given away the store,” and that it would be pretty surprising if the logic of the minarchist argument allowed them to stop where they do. On the other side of the equation, modern liberals need to get more credit from libertarians in desiring and defending limited government. The governments of the successful liberal democracies are in fact remarkably limited relative to the possibilities, both in terms of respect for rights and in refraining from crowding out the efficient private provision of goods and services–which explains their success. That said, it would be pretty surprising if either the modern liberal state or modern liberal theory (which often looks suspiciously like ad hoc apologetics for the modern liberal state) gets the limits of government right as either a matter of morality or efficiency.
There's lots of other stuff to talk about: the paternalism of modern liberalism as a failure of limited government; the consistency of social insurance and poverty-mitigating redistribution with a principled account of limited government; and other stuff–but those are separate posts.