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.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Abramovitz, M. (1986). Catching up, forging ahead, and falling behind.Journal of Economic History 66 (2): 385–406.
Bairam, E. (1989). Government expenditure and economic growth: reflections on professor Ram's approach, a new framework and some evidence from New Zealand Time-Series Data.Keio Economic Studies 25 (1): 59–66.
Barro, R.J. (1989). A cross-country study of growth, saving, and government. NBER working paper no. 2855.
Barro, R.J. (1990). Government spending in a simple model of endogenous growth.Journal of Political Economy 98 (5): S103-S125.
Barro, R.J. (1991). Economic growth in a cross section of countries.Quarterly Journal of Economics 106 (2): 407–443.
Baumol, W.J., Blackman, S.A.B. and Wolff, E.N. (1989).Productivity and American leadership. Cambridge, MA: MIT Press.
Buchanan, J.M. (1980). Rent seeking and profit seeking. In J.M. Buchanan, G. Tullock and R. Tollison (Eds.),Toward a theory of a rent seeking society. Texas A. and M. University Press.
Cameron, D. (1982). On the limits of the public economy.Annals of the Academy of Political and Social Science 459 (January): 46–62.
Carr, J.L. (1989). Government size and economic growth: a new framework and some evidence from cross-section and time-series data: comment.American Economic Review 79 (1): 267–280.
Conte, A. and Darrat, A.F. (1988). Economic growth and the expanding public sector: a reexamination.Review of Economics and Statistics 70 (2): 322–330.
Dowrick, S. and Gemmell, N. (1991). Industrialisation, catching up and economic growth: a comparative study across the world's capitalist economies.Economic Journal 101 (405): 263–275.
Dowrick, S. and Nguyen, D.-T. (1989). OECD comparative economic growth 1950–85: catching up and convergence.American Economic Review 79 (5): 1010–1030.
Easterlin, R.A. (1974). Does economic growth improve the human lot? Some empirical evidence. In P.A. David and M.W. Reder (Eds.),Nations and households in economic growth. New York: Academic Press.
Engen, E.M. and Skinner, J. (1992). Fiscal policy and economic growth. NBER working paper no. 4223.
Gould, F. (1983). The development of public expenditures in western industrialized countries: a comparative analysis.Public Finance 38 (1): 38–69.
Grier, K.B. and Tullock, G. (1989). An empirical analysis of cross-national economic growth, 1951–80.Journal of Monetary Economics 24 (2): 259–276.
Hansson, I. (1984). Marginal cost of public funds for different tax instruments and government expenditures.Scandinavian Journal of Economics 86 (2): 115–130.
Holmes, J.M. and Hutton, P.A. (1990). On the causal relationship between government expenditures and national income.Review of Economics and Statistics 72 (1): 87–95.
ILO (1986).The challenge of employment and basic needs in Africa. Nairobi: Oxford University Press.
Kaldor, N. (1966).Causes of the slow rate of economic growth of the United Kingdom: an inaugural lecture. Cambridge: Cambridge University Press.
Katz, C.J., Mahler, V.A. and Franz, M.G. (1983). The impact of taxes on growth and distribution in developed capitalist countries: a cross-national study.American Political Science Review 77 (4): 871–886.
King, R.G. and Rebelo, S. (1990). Public policy and economic growth: developing neoclassical implications.Journal of Political Economy 98 (5): S126-S150.
Kormendi, R.C. and Meguire, P.G. (1985). Macroeconomic determinants of growth: cross-country evidence.Journal of Monetary Economics 16 (2): 141–164.
Korpi, W. (1985). Economic growth and the welfare system: leaky bucket or irrigation system?European Sociological Review 1 (2): 97–118.
Koskela, E. and Virén, M. (1992). Is there a Laffer curve between government size and private output: some evidence from a market price approach. Research report no. 20, Department of Economics, University of Turku.
Landau, D. (1983). Government expenditure and economic growth: a cross-country study.Southern Economic Journal 49 (4): 783–792.
Landau, D. (1986). Government and economic growth in the less developed countries: an empirical study for 1960–1980.Economic Development and Cultural Change 35 (October): 35–75.
Levine, R. and Renelt, D. (1992). A sensitivity analysis of cross-country growth regressions.American Economic Review 82 (4): 942–961.
Liesner, T. (1989).One hundred years of economic statistics. London: The Economist Publications.
Lindauer, D.L. and Sabot, R. (1983). The public/private wage differential in a poor urban economy.Journal of Development Economics 12 (2): 137–152.
Lindbeck, A. (1983). Budget expansion and cost inflation.American Economic Review 73 (2): 285–296.
Meyer-zu-Schlochtern, F.J.M. (1988). An international sectoral data base for thirteen OECD countries. Working paper no. 57, OECD Econometric Unit, Paris.
Mueller, D.C. (1989).Public choice II. Cambridge: Cambridge University Press.
Myrdal, G. (1960).Beyond the welfare state. New Haven, CN: Yale University Press.
Olson, M. (1982).The rise and decline of nations. New Haven, CN: Yale University Press.
Plosser, C.I. (1992). The search for growth. InPolicies for long-run grown. Kansas: The Federal Reserve Bank of Kansas City.
Psacharopoulos, G. and Tzannatos, Z. (1992). Latin American women's earnings and participation in the labor force. The World Bank, WPS 856.
Ram, R. (1986). Government size and economic growth: a new framework and some evidence from cross-section and time-series data.American Economic Review 76 (1): 191–203.
Rao, V.V.B. (1989). Government size and economic growth: a new framework and some evidence from cross-section and time-series data: comment.American Economic Review 79 (1): 272–280.
Saunders, P. (1985). Public expenditure and economic performance in OECD countries.Journal of Public Policy 5 (1): 1–21.
Smith, D. (1975). Public consumption and economic performance.National Westminster Bank Review, November, 17–30.
Solow, R.M. (1956). A contribution to the theory of economic growth.Quarterly Journal of Economics 70 (1): 65–94.
Trehan, B. and Walsh, C.E. (1988). Common trends, the government's budget constraint, and revenue smoothing,Journal of Economic Dynamics and Control 12 (2–3): 425–444.
Ward, M. (1985).Purchasing power parities and real expenditure in the OECD. Paris: OECD.
White, H. (1980). A heteroscedasticity-consistent covariance matrix estimator and a direct test for heteroscedasticity.Econometrica 48 (4): 817–838.
Author information
Authors and Affiliations
Additional information
Financial support fromJan Wallanders och Tom Hedelius stiftelse för samhällsvetenskaplig forskning is gratefully acknowledged.
Rights and permissions
About this article
Cite this article
Hansson, P., Henrekson, M. A new framework for testing the effect of government spending on growth and productivity. Public Choice 81, 381–401 (1994). https://doi.org/10.1007/BF01053239
Accepted:
Issue Date:
DOI: https://doi.org/10.1007/BF01053239