The impact of productive and non-productive government expenditure on economic growth: an empirical analysis in high-income versus low- to middle-income economies

Abstract

This paper examines the relationship between the compositions of government expenditure and economic growth. It develops an endogenous growth framework drawing on variables from existing models, and separates government expenditure into productive and non-productive forms. Using panel data from 37 high-income and 22 low- to middle-income countries covering 1993–2012, our findings are based on OLS fixed effects and GMM techniques. We challenge much of the existing empirical literature in relation to developing economies by showing that a shift in government expenditure away from non-productive government expenditure and towards productive forms of expenditure are associated with higher levels of growth in both high-income and low- to middle-income economies. Moreover, we identify the differing components of government expenditure that are most associated with increased long-run output levels in both high-income and low- to middle-income economies.