Does Government Expenditure Matter for Economic Growth?

• Published in: Global policy 2018-05, Vol.9 (2), p.203-215
• Main Authors: Laboure, Marion, Taugourdeau, Emmanuelle
• Format: Article
• Language: English
• Subjects: Economic development; Economic growth; Economic models; Expenditures; Government spending; Panel data; Public finance
• ISSN: 1758-5880; 1758-5899
• DOI: 10.1111/1758-5899.12540

This paper aims to determine how the composition of public expenditure affects countries’ economic growth depending on their level of development. We show that there is a strong association between a country's level of development and the amount of public spending. Productive spending dominates in poorer countries while richer countries have a higher proportion of unproductive spending. Furthermore, productive spending has a greater effect on growth in poorer countries. We illustrate our findings using dynamic panel GMM estimators with data from 147 countries (31 low, 69 medium and 47 high‐income countries) covering the period 1970–2008. We also find that education expenditures are the more productive public spending. In terms of expenditure categories, education, health and defense spending are all significantly and positively correlated with economic growth in low‐income countries. However, education spending (classified as very productive) has a much greater (positive) effect than health and defense spending do. In high‐income countries, these expenditures are all unproductive. Population growth has a significant positive impact on economic growth for all countries.