The long-term impact of public expenditures on GDP-growth

Abstract

Are governments able to continuously boost economic growth by spending for decades? Can the state be a more efficient user of income by improving the structure of public spending? The paper analyses the correlation between various types of public expenditures and GDP growth in different countries of the EU. The database was composed from the Classification of the Functions of Government (COFOG) classification of public spending, which contains data of 25 EU economies in the period 1996–2017. Three econometric models were applied in accordance with the empirical practice found in the literature: first-differences general method of moment (GMM), fixed effects panel and ordinary least squares (OLS) models. The expenditures on social protection proved to have a negative, statistically significant and robust impact on GDP growth. The results are similar for general public spending, and while spending on public order also has a significant and robust coefficient, its sign is ambiguous. The novelty of the article relate to the findings on lagged education and health spending, which have a positive impact on GDP growth.