Can a Government Enhance Long-Run Growth by Changing the Composition of Public Expenditure?
IMF Working Papers, July 8, 2013
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Bibliographic details
- Authors: Santiago Acosta Ormaechea, Atsuyoshi Morozumi
- Published: July 8, 2013
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475550597.001
Summary
- This paper studies the effects of public expenditure reallocations on long-run growth.
- Dataset assembled from the IMF’s GFS yearbook for the period 1970-2010 and 56 countries (14 low-, 16 medium-, and 26 high-income countries).
- Estimation method: dynamic panel GMM estimators.
- Main findings:
- A reallocation involving a rise in education spending has a positive and statistically robust effect on growth when the compensating factor remains unspecified or when it is associated with an offsetting reduction in social protection spending.
- Public capital spending relative to current spending appears to be associated with higher growth, yet results are non-robust in this latter case.
Data and Methodology
- Data source: IMF’s GFS yearbook.
- Sample coverage: period 1970-2010; 56 countries (14 low-, 16 medium-, and 26 high-income countries).
- Empirical approach: dynamic panel GMM estimators.
- Focus variables (as described in the source): Capital spending, Education spending, Social protection spending, Total expenditures, share variable, expenditure composition, expenditure subcomponent, expenditure outlay.
Key Findings and Evidence
- Education spending:
- Reallocation toward education spending -> positive and statistically robust effect on long-run growth when compensating factor is unspecified.
- Effect remains positive and robust when the compensating factor is an offsetting reduction in social protection spending.
- Public capital spending:
- Higher public capital spending relative to current spending appears associated with higher growth.
- However, results for public capital spending are non-robust.
- Robustness: The positive link between education spending and growth shows statistical robustness under specified conditions; the capital spending result does not.
Policy Implications
- Reallocating public expenditure toward education can be growth-enhancing, particularly if compensating adjustments are unspecified or involve reductions in social protection spending.
- Caution is warranted regarding reallocations toward public capital spending because evidence of growth benefits is not robust.
- Policy designs that change expenditure composition should consider the nature of compensating fiscal adjustments (e.g., reductions in social protection) as these influence growth outcomes.