Public social spending, government effectiveness, and economic growth: an empirical investigation

Abstract

ABSTRACT This paper reports the results of an empirical investigation into the relationships between public social spending, government effectiveness, and economic growth. Using panel data covering 132 developed and developing countries over the 2008 to 2019 period, we find significant and complementary relationships among the variables through fixed effects, system GMM, and instrumental variable estimation. All three components of public social spending, including social security benefits, education expenditure, and health expenditure, have a significant and positive impact on subsequent economic growth. Government effectiveness has a direct growth-enhancing effect as well as a mediating and positive effect on the association between public social expenditures and economic growth. Thus, governments accelerate the positive impact of public social spending on economic growth. These relationships hold for countries at all income levels, while the channels predicting a positive social spending – growth relationship are stronger in high-income countries than lower-income countries. To stimulate inclusive growth, governments must actively design and implement social spending policies. These, however, should be complemented by concomitant efforts to strengthen the quality of public institutions, which exerts a substantial impact on the social spending – growth relationship.