The impact of public expenditure on economic growth: A review of international literature

Abstract

In this paper, theoretical and empirical literature on the relationship between government expenditure and economic growth has been reviewed in detail. Specific focus was placed on the review of literature that assessed the impact of government spending on economic growth. The literature reviewed has shown that the impact of government spending on economic growth is not clear cut. It varied from positive to negative; with some studies even finding no impact. The study identified a number of factors that could be driving this inconsistency in conclusions by various studies on the same topic. Differences in the study samples, study periods, methodologies employed and the proxies for government expenditure have been the key causes of varying results and conclusions on the nature of the impact of government spending on economic growth. This study has also revealed that as economists get desperate in concluding the government expenditure-economic growth debate, they are increasingly disaggregating the government expenditure into various components and test the impact of each component on economic growth. The practice has, however, not been able to move the debate closer to its conclusion, as the results from such practice are also widely varying. Although the impact of government spending on economic growth was found to be inconclusive, the scale tilts towards a positive impact.