Does the Composition of Government Expenditure Matter for Long-Run GDP Levels?
Victoria University of Wellington Public Finance Working Paper No. 10
40 Pages Posted: 23 Aug 2014
Date Written: August 1, 2014
We examine the long-run GDP impacts of changes in total government expenditure and in the shares of different spending categories for a sample of OECD countries since the 1970s, taking account of methods of financing expenditure changes and possible endogenous relationships. We provide more systematic empirical evidence than available hitherto for OECD countries. Our results provide strong evidence that reallocating total spending towards infrastructure and education would be positive for long-run income levels. Increasing the share of social welfare spending (and away from all others pro-rata) may be associated with, at most, modestly lower long-run GDP levels.
Keywords: government expenditure composition, fiscal policy, GDP
JEL Classification: H50, O40
Suggested Citation: Suggested Citation