From budgets to growth: a global perspective on the influence of the government on economic growth

• Main Authors: Lum, Shau En, Low, Vanessa Ee Fen, Tan, Zheng Liang
• Other Authors: Guangzhi Ye
• Format: Final Year Project
• Language: English
• Published: Nanyang Technological University 2024
• Subjects: Social Sciences; Fiscal policy; Solow model; Government spending
• Online Access: https://hdl.handle.net/10356/175435
• Institution: Nanyang Technological University

This paper investigates the dynamic relationship between government spending and economic growth, focusing on the post-Global Financial Crisis (GFC) era as public debt levels rose significantly after the crisis. Expanding on Khan and Kumar's (1993) augmented Solow model that distinguished the roles between public and private capital investment, we incorporated the public sector's size and analyzed data from a broader sample of countries spanning 1995-2019 using an Ordinary Least Squares (OLS) model. The empirical findings reveal a positive association between public investment and economic growth pre-GFC, but a surprisingly negative effect afterward. In addition, the size of the public sector, proxied by the share of government investment and consumption in the economy, also had a negative impact on growth post-GFC. These results suggest a potential paradigm shift in the impact of government spending on economic growth, with significant implications for modern fiscal policy, considering the growth in public debt after the COVID-19 pandemic. This implies that governments must be more selective about their spending plans and ensure that it does not weigh on economic growth.