The composition of government spending and growth: Is current or capital spending better?

Ghosh, Sugata; Gregoriou, Andros

Abstract

In an endogenous growth framework with two public goods with differing productivities, this paper analytically characterizes optimal fiscal policy for a decentralized economy, whereby the optimal values of the growth rate, tax rate and expenditure shares on the two public goods are linked directly to their productivity parameters. Using panel data for 15 developing countries over 28 years, we show using GMM techniques, that current (capital) spending has positive (negative) and significant effects on the growth rate, contrary to commonly held views. For instance, spending on operations and maintenance has a stronger impact on growth than both health and education spending. We consider the various components on the revenue side of the government budget constraint to take into account possible omitted variable bias that could arise if tax revenue alone was considered.

Citation

Ghosh, S., & Gregoriou, A. (2008). The composition of government spending and growth: Is current or capital spending better?. Oxford economic papers, 60(3), 484-516. https://doi.org/10.1093/oep/gpn005

• Journal Article Type: Article
• Acceptance Date: Oct 10, 2007
• Online Publication Date: Oct 10, 2007
• Publication Date: Mar 6, 2008
• Deposit Date: Nov 13, 2014
• Journal: Oxford Economic Papers-New Series
• Print ISSN: 0030-7653
• Publisher: Oxford University Press
• Peer Reviewed: Peer Reviewed
• Volume: 60
• Issue: 3
• Pages: 484-516
• DOI: https://doi.org/10.1093/oep/gpn005
• Keywords: Economics and Econometrics
• Public URL: https://hull-repository.worktribe.com/output/466309
• Publisher URL: https://academic.oup.com/oep/article/60/3/484/2362039
• Contract Date: Nov 13, 2014