A New Framework for Testing the Effect of Government Spending on Growth and Productivity

32 Pages Posted: 6 Jul 2007

See all articles by Pär Hansson

Pär Hansson

University of Orebro

Magnus Henrekson

Research Institute of Industrial Economics (IFN)

Abstract

Does government spending have a positive or negative effect on economic growth? The results of earlier empirical studies give mixed results. In this study we suggest a new method for testing the effect of different kinds of government expenditure on productivity growth in the private sector. The focus on productivity in the private sector and the use of disaggregated data makes it possible to avoid or mitigate a number of methodological problems. The major conclusions, which are quite robust, are that government transfers, consumption and total outlays have consistently negative effects, while educational expenditure has a positive effect, and government investment has no effect on private productivity growth. The impact is also found to work solely through total factor productivity and not via the marginal productivity of labor and capital.

Keywords: Disaggregated study, Government expenditure, Productivity growth, Total factor productivity

JEL Classification: H30, O41

Suggested Citation

Hansson, Pär and Henrekson, Magnus, A New Framework for Testing the Effect of Government Spending on Growth and Productivity. Public Choice, Vol. 81, Nos. 3-4, 1994, Available at SSRN: https://ssrn.com/abstract=998270

Pär Hansson (Contact Author)

University of Orebro ( email )

Sköldvägen 6 151 53 Södertälje
SE-70182 Orebro
Sweden

Magnus Henrekson

Research Institute of Industrial Economics (IFN) ( email )

P.O. Box 55665
Grevgatan 34
Stockholm, SE-10215
Sweden
+46-8-6654502 (Phone)
+46-8-6654599 (Fax)

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