FISCAL SPENDING AND ECONOMIC GROWTH

Abstract

(ProQuest: ... denotes formulae omitted.)1. INTRODUCTIONStruggling to overcome the global financial crisis that began in 2008, policymakers worldwide began to take increasing interest in the active role that fiscal policy could play in managing such a crisis. The dragging financial crisis in Europe and the rut of slow economic growth worldwide have further prompted governments and researchers alike to look for possible fiscal measures that can induce stable economic growth.The onset of the latest global financial crisis has led the majority of governments worldwide to adopt an expansionary fiscal stance, which has quickly worsened the fiscal deficits in many countries. These states thus took a radical turn in the other direction and began to focus on securing greater fiscal resources so as to quicken the fiscal recovery process and brace for possible fluctuations in the business cycle in the future. As low economic growth has become a norm around the globe, governments have persisted in their policies for fiscal stabilization, while also introducing diverse new measures to promote stable economic growth.This study is a response to the need for more and wider-ranging research on the correlation between fiscal policy and economic growth and surveys the recent debates on the diverse ways fiscal spending affects economic growth so as to help policymakers make the right choices in the future.This study provides a holistic overview of the many partial debates and arguments that have been put forward recently regarding the correlation between fiscal spending and economic growth. Moreover, this study also provides an empirical analysis of the effects that fiscal spending of diverse purposes exerts on economic growth using a consistent and uniform standard that can be applied to various countries around the world, thereby delineating the implications of policy on fiscal resource distribution in the future. This study groups fiscal spending into a few categories and examines each in terms of defining characteristics.The organization of this paper is as follows. Section 2 provides a survey of the established literature discussing how different fiscal spending items or categories affect economic growth and examines recent trends and patterns in fiscal spending item by item in OECD member states. Section 3 applies an endogenous growth model in order to demonstrate how fiscal spending and the structural changes thereof affect economic growth. Section 4 provides an empirical analysis based on a fixed-effect model. The analysis compares the OECD member countries with one another in order to determine the relationships between fiscal spending of various categories and economic growth. Section 5 sums up the findings and suggest some policy implications.2. FISCAL SPENDING AND ECONOMIC GROWTH: RECENT TRENDSThere is a well-established and flourishing body of literature on the impact of government spending on economic growth at multiple levels and via diverse channels. These studies serve to spark public controversies and raise key issues in one way or another. We study the established literature to find and redefine the categories of fiscal spending to examine their impact on economic growth.Pitlik and Schratzenstaller (2011) divide fiscal spending into two categories, namely, productive and unproductive expenditure. The former consists of core government spending, infrastructure expenditure, and merit-goods spending programs. The latter consists of redistribution, interest expenditure, and other types of spending. These categories indeed neatly match the functional spending categories listed in the Classification of Functional Expenditure of Governments (COFOG), used by such international organizations as the IMF, the United Nations (UN), and the OECD. Table 1 matches these functional categories of fiscal spending with the categories of fiscal spending found in theory and in real-life practices. …