Can a Government Enhance Long-run Growth by Changing the Composition of Public Expenditure?

This paper examines the impact of a compositional change in public expenditure on long-run growth. To do this, we construct a new dataset based on the IMF's government finance statistics (GFS) yearbook covering the period 1970-2010 for 56 countries (14 low-, 16 medium-, and 26 high-income countries). We then study the causal effects of changes in the composition of expenditure on growth using generalized-method-of-moments (GMM) dynamic panel estimators. Our main finding is that a government can promote long-run growth by increasing education spending offset by a fall in social spending (i.e., health and social protection). An increase in public spending on infrastructure, however, does not appear to enhance growth when compensated by a fall in spending on other components, most notably education and social spending.