The Multiplier Effects of Government Expenditures on Social Protection: A Multi-country Study

Abstract

This article uses a novel dataset comprising 42 countries for the years 1985–2020 to explore the relationship between public spending on social protection and GDP. The article contributes to the empirical literature on social protection spending by conducting a large multi-country study using the structural vector autoregression approach. The results of the study highlight the positive effects of social protection expenditures on GDP that surpass those of total government expenditures. These results vary considerably across countries, with impact multipliers ranging from 5 in Mexico to -0.71 in Paraguay. The authors find that the cumulative multiplier exceeds 1 for most of the 42 sample countries, suggesting that the positive impact of social protection spending on GDP accumulates over time. The article finds statistically significant and strong correlations between the cumulative and impact multipliers and inequality measures such as the Gini coefficient and the income shares of the poorest and the richest. Indeed, the positive impact of public spending on social protection on GDP is especially pronounced in countries characterized by higher inequality. Taken together, the results have significant policy implications and suggest that the growth-enhancing potential of social protection policies is complementary to the ability of such policies to reduce inequality.