THE GOVERNMENT SPENDING: EFFICIENCY AND ECONOMIC GROWTH

Abstract

The relationship between government expenditure and economic growth remains one of the most contested empirical questions in public finance, with prior studies yielding mixed and often contradictory results. This study investigates the joint role of public expenditure composition, spending efficiency, and institutional quality in shaping long-run economic growth across a panel of 78 advanced and emerging economies during the period 2000–2022. Employing a two-step system Generalized Method of Moments (GMM) estimator to address endogeneity and dynamic panel bias, the analysis disaggregates public expenditure into productive (infrastructure, education, health, and research and development) and unproductive (general administration and untargeted transfers) categories, and integrates a Data Envelopment Analysis (DEA)–based Public Spending Efficiency index. The empirical results indicate that the level of total government expenditure exerts no robust effect on growth once composition is controlled for, while productive expenditure is positively and significantly associated with GDP per capita growth (β = 0.218, p < 0.01). Institutional quality, measured through the World Governance Indicators, substantially amplifies the growth-enhancing effect of productive spending, particularly in emerging economies. The findings suggest that fiscal policy reforms aimed at enhancing growth should prioritize expenditure reallocation toward productive categories and the strengthening of governance frameworks, rather than focusing on aggregate spending levels alone.