Investigating relationship between Government Spending and Economic Growth: Public Spending and long-run GDP level
DOI:
https://doi.org/10.14456/tresp.2018.5Keywords:
Fiscal policy, Economic growth, Public expenditure, GovernmentAbstract
This study investigates the relationship between public spending and long-run GDP per capita. While most fiscalgrowth studies put emphasis on the relationship in the publicpolicy endogenous growth model, this analysis allows for Solow-type transitional dynamics where the effects of fiscal policy can be persistent. Moreover, the long-run and short-run effects of fiscal changes are identified separately in this analysis using the groups of countries comprising 38 countries (17 developing countries and 21 high-income OECD countries). Our results show that an increase in total spending which is financed by non-distortionary taxes only enhances the level of GDP per capita in high-income OECD countries. With a given level of total spending, increases in the shares of healthcare and general public services spending can improve the levels of GDP per capita in developing countries. On the other hand, increasing the share of education spending in a high-income OECD country is conducive to increasing the level of GDP per capita
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