Impact of Various Components of Government Expenditure on Economic Growth: Evidence from Developed and Developing Countries

The primary objective of the paper is to study how different components of government spending affect economic growth using panel data for 20 developed and developing countries from 2001 to 2014. The empirical results in this area of study are mixed. Two classifications of the government expenditure have been adopted-economic (current and capital expenditures) and functional (expenditure on defence, health, education and social protection). Panel data, both random effects (RE) and fixed effects (FE), have been estimated for developed and developing countries as well as for the pooled sample. Hausman specification test has been applied to select between the FE and RE model. Empirical estimates indicate that (1) according to the economic classification, current expenditures negatively affect economic growth, and the effect is significant for developed countries and pooled sample. The effect of capital expenditures is negative only for developing countries; however, the coefficients are statistically insignificant for all the three sets of countries. (2) As per the functional classification, defence expenditures negatively affect economic growth, and the effect is significant for developed countries and pooled sample. Government spending on health and education has a positive effect on the rate of growth of per capita income. However, the effect is statistically significant only for education, that too for developed countries and pooled sample. The impact of public spending on social protection is less clear for developed and developing countries. For the pooled sample, the effect is positive but insignificant. Empirical results suggest government expenditures if deployed conductively can be a significant determinant of economic growth.