The Impact of Public Expenditure on Economic Growth: A Review of International Literature

Abstract Research background: Although a number of studies have been conducted on the relationship between public expenditure and economic growth, it is difficult to tell with certainty whether or not an increase in public expenditure is good for economic growth. This lack of consensus on the results of the previous empirical findings makes this study of paramount importance as we take stock of the available empirical evidence from the 1980s to date. Purpose: In this paper, theoretical and empirical literature on the relationship between government expenditure and economic growth has been reviewed in detail. Focus was placed on the review of literature that assessed the impact of government spending on economic growth. Research Methodology: This study grouped studies on the impact of public expenditure on economic growth based on their results. Three groups emerged – positive impact, negative impact and no impact. This was followed by a review of each relevant study and an evaluation of which outcome was more prevalent among the existing studies on the subject. Results: The literature reviewed has shown that the impact of government spending on economic growth is not clear cut. It varies from positive to negative; with some studies even finding no impact. Although the impact of government spending on economic growth was found to be inconclusive, the scale tilts towards a positive impact. Novelty: The study provides an insight into the relationship between public expenditure and economic growth based on a comprehensive review of previous empirical evidence across various countries since the 1980s.


Introduction
The relationship between government spending and economic growth has attracted widespread attention over the years as economists and politicians battle to establish the impact of government spending on economic growth. The outcome of their work has been more confusing than it has been helpful, because of the lack of consensus on the results and conclusions reached.
From the theoretical perspectives, there are the Keynesians that advocate for the positive impact of government spending on economic growth; and the Classicals and the Neoclassicals that postulate that government spending has a negative impact on economic growth (Romer, 1986;Lowenberg, 1990). There are also those that found a middle ground where government spending is postulated to have a positive impact on economic growth up to a certain optimal threshold, above which the impact of government spending on economic growth turns negative (Barro, 1989;Friedman, 1997).
With government spending still on the rise in many economies, on the one hand, and declining economic growth rates in these economies, on the other, the debate on whether government spending has a positive, negative or neutral impact on economic growth is still raging today -with some studies going an extra mile disaggregating government expenditure into various components. Still, the outcome has been largely inconclusive.
Against this background, the objective of this study is to review the empirical literature available to date on the impact of government spending on economic growth. The aim of this literature review based study is to weigh the existing arguments as to whether government expenditure has any effect on economic growth or not; and further explore the argument of whether government expenditure has a positive or negative impact on economic growth, in the cases where a relationship is established between these two key variables. Understanding the nature of impact, if any, of government spending on economic growth cannot be overemphasised in current times when domestic and global economic growth rates are depressed and public debt in skyrocketing ad governments borrow to increase their expenditure as they attempt to revive their economies. Pursuant to this aim, the hypothesis of the study is that government expenditure has a positive impact on economic growth. The study is expected to add to the body of knowledge an assessment of existing views on the impact of government spending on economic growth across various study countries and rank the views accordingly. Following on from this study is also a recommendation to policy makers on how government spending is likely to impact on economic growth. Besides offering policy implication of the public expendituregrowth relationship, this study also assists the research fraternity by putting together related literature on the subject in an analytical manner, making related future studies easier.
To achieve the aim of the study, the document review methodology was used. Empirical studies on the impact of public expenditure on economic growth were gathered from various accredited journals. The literature was further grouped based on their results. Three groups emerged. The first group was of studies that found a positive relationship between public expenditure and economic growth while the second group was made up of studies that found public expenditure to have a negative impact on economic growth. Then, there is the third group which consisted of studies that found no significant impact of public expenditure on economic growth. The grouping was followed by a review of each relevant study and an evaluation of which outcome was more prevalent among the existing studies on the subject. The review outcome was further summarised in tables.
The rest of the paper is organised as follows: the second section dwells on the theoretical literature review while the third section reviews the empirical literature on the impact of government expenditure on economic growth. The fourth section concludes the paper.

The Impact of Public Expenditure on Economic Growth: Theoretical Literature Review
Although the relationship between government expenditure and economic growth has attracted the attention of economists, policy makers and politicians over the years, the debate is still raging. The bone of contention is whether the impact of government size on economic growth is positive, negative or insignificant. Different schools of thought have different conclusions on this contentious topic.
According to the Keynesian theory, government spending has a positive impact on economic growth. The Keynesian theory postulates that the more a government spends, the higher the economic growth is as a result of expansionary fiscal policy (Romer, 1986).
The premise is that as the government spending trends up, production will follow suit, leading to aggregate demand stimulation, and therefore, increased levels of GDP. Private investment is another channel through which government spending can exert positive effects on economic growth. According to R. Ram (1986) and K.H. Ghali (1998), increasing government expenditure encourages private investment, which will translate to higher economic growth.
On the extreme end of the theorists' continuum are the Classicals, the Neoclassicals and the public choice theorists, who claim that government expenditure is bad for economic growth as a result of the crowding-out effect -as spending by governments' displaces critical investments by the private sector due to resource constraints. Hence, the relationship between the two is negative (Lowenberg, 1990). It is the viewpoint of public choice theorists that as government size increases, and given the distortionary effects of taxation, government levels of inefficiencies are bound to increase, hence government spending is bound to reduce economic growth.
Besides the theorists at the extreme ends of the continuum are those in the middle, who have found a middle ground -and settled on the view that the relationship between government spending and economic growth is non-linear; and has an optimal point below which government spending has a positive impact on economic growth and above which it has a negative impact on economic growth (Barro, 1989). The middle ground view posits that the role of government in a free and open society is vital; and that government expenditure contributes positively to economic growth. However, M. Friedman (1997) acknowledges that as government spending increases from the optimal level of 15% of national income to 50%, the impact of public expenditure on economic growth tends to be negative.
Still on the middle ground, R. Ram (1986) found a compromise between the Keynesian theory and the public choice theory based on expenditure types. According to S. Ram (1986), expenditure on the core areas of government has positive effects on economic growth, while government spending on non-core areas has a negative impact on economic growth.

Positive Impact
After observing that government expenditure has been on the rise while economic growth has slowed substantially, D. Landau (1983) empirically examined the relationship between government spending and economic growth in 65 under-developed countries. Based on government spending that was disaggregated into capital and investment spending; and using panel data analysis techniques, the study revealed that though the effect was minute, government capital spending had a positive impact on economic growth. D.A. Aschauer (1989) investigated the impact of aggregated and disaggregated public expenditure on economic growth in the United States of America (US) during the period from 1949 to 1985 using annual data. The empirical results revealed that in the US, the nonmilitary public capital stock has a more significant positive impact on economic growth than its military counterpart. Further, D.A. Aschauer found that the core infrastructure of streets, highways, airports, mass transit, sewers and water systems, has the most explanatory power for productivity.

Negative Impact
After observing that government expenditure has been on the rise while economic growth has slowed substantially, D. Landau (1983) empirically examined the relationship between government spending and economic growth in 65 under-developed countries. Based on government spending that was disaggregated into capital and investment spending; and using panel data analysis techniques, the study provided evidence of an inverse relationship between government consumption expenditure and economic growth in the study countries.
In his quest to establish the determinants of economic growth in a cross section of 98 countries, R.J. Barro (1991) examined the impact of various macro-economic variables, including government expenditure which was split into government investment and government consumption expenditure. Using data stretching from 1960 to 1985, the results of the study revealed that government consumption expenditure was inversely related to economic growth in the sample countries.
Using a 43 developing country data set stretching over 20 years, S. Devarajan et al. (1996) added value to literature on the level of public expenditure and growth by exploring the conditions under which a change in the composition of expenditure results in a higher, and a steady, economic growth rate. Both the physical productivity of the different components of public expenditure as well as the initial shares were considered. The results of the study showed that, contrary to expectations, the capital component of public expenditure had a negative impact on economic growth. The authors concluded that seemingly productive government expenditure components may turn unproductive if applied excessively.
In 1999, R.J. Barro (1999) carried out an empirical investigation into the determinants of economic growth for a panel of 100 countries using data from 1960 to 1995. Government consumption expenditure and government investment spending were some of the key variables included in the study. Among other findings, the results of the study indicated that government consumption expenditure had a negative impact on economic growth and it was concluded that government consumption spending should be relatively low to ensure high levels of economic growth.
C. Schaltegger and B. Torgler (2006) also put the government size-economic growth relationship to the test in 2006, when they empirically examined the relationship between the two macroeconomic variables using data for Switzerland over a period from 1981-2001. Public expenditure was further disaggregated into two components -operating budgets and capital budgets. Government spending by the state, and local governments, was also considered. Using time-series analysis tools, the finding of the study revealed that in Switzerland, the overall spending by the government as well as government spending from operating budgets, has a robust negative impact on economic growth.
S. Ghosh and A. Gregoriou (2008) also investigated the relationship between disaggregated government expenditure and economic growth in 15 developing countries using the GMM.
The results varied depending on the type of government expenditure under considerationcapital or current. Capital spending was found to have a negative impact on economic growth. S. Taban (2010) re-investigated the government expenditure-economic growth nexus for the Turkish economy using quarterly data covering the period from period from 1987: Q1 to 2006: Q4. Various proxies were used to capture government expenditure -total government expenditure, the share of government consumption spending to GDP, government investment expenditure to GDP and government consumption spending to GDP ratio. Based on the ARDL bounds testing approach, the results of the study revealed that the share of total government spending, and the share of government investment spending to GDP had a negative impact on economic growth in Turkey.
A. Nurudeen and A. Usman (2010)  O.F. Altunc and C. Aydın (2013) examined the relationship between government expenditure and the rate of economic growth in three countries -Turkey, Romania and Bulgaria -using data from 1995-2011. The main focus of the study was to establish whether the relationship between these two variables is linear or an "inverted U" shape; and to find out the optimal level of government spending in each of the study countries. Using the ARDL bounds testing approach, the empirical finding of the study revealed that in the study countries, the level of government expenditure exceeded the optimal level, hence a lower than desired economic growth rate.
A.G. Hasnul (2015)  to 2014. However, government expenditure was further divided into various components. Using the regression model for panel data, including a random effect, to analyse the data, the findings showed that public expenditure on the social services sector was found to have a negative impact on economic growth in the study country.
T.G. Chirwa and N.M. Odhiambo (2016) carried out a study to empirically determine the long-run drivers of economic growth in South Africa over a period from 1970 to 2013. Using the ARDL technique, the results of the study indicated that government spending had a significant negative impact on economic growth in South Africa, both in the short run and in the long run. M.P. Sáez et al. (2017) studied the relationship between government spending and economic growth in European Union countries using data stretching from 1994 to 2012. Using panel data techniques, the results of the study revealed that, while the relationship between government spending and economic growth can be positive or negative, depending on the countries included in the sample, the period of estimation and the variables used to proxy the public sector size, government spending has a negative impact on economic growth in European Union countries. In their study on the impact of aggregated and disaggregated public expenditure on economic growth in Nigeria, during the period from 1981 to 2017, L.U. Okoye et al. (2019) found evidence of the short-run negative impact of current expenditure on economic growth. Table 2 summarises studies in favour of the negative impact of government expenditure on economic growth. R.J. Barro (1991) 98 countries Disaggregated Cross-section Negative (consumption expenditure) S. Devarajan et al. (1996) 43 developing countries Disaggregated Panel Negative (capital expenditure) R.J. Barro (1999) 100

Insignificant Impact
In his quest to establish the determinants of economic growth in a cross section of 98 countries, R.J. Barro (1991) examined the impact of various macro-economic variables, including government expenditure, which was split into government investment and government consumption expenditure. Using data stretching from 1960 to 1985, the results of the study indicated that government investment expenditure was insignificantly related to economic growth in the sample countries.

Concluding Remarks
This paper has reviewed both a theoretical and empirical literature review on the relationship between government expenditure and economic growth, with a specific focus on the impact of the former on the latter. The reviewed literature provides an insight into developed and developing countries, with some instances having a sample of mixed countries at developed and developing stages. Empirical works of varying methodologies were also reviewed.
What came out of the literature review exercise prominently was that the impact of government expenditure on economic growth was not definite. It ranged from being positive to negative and to no impact all. While the first two possibilities were the only outcome possible from a theoretical viewpoint, all three outcomes found empirical support. The study has also found that the impact of government spending on economic growth varied considerably depending on the study country, methodology used, the proxy for government expenditure, and study period under consideration. This review has also shown that most studies assessing the impact of government expenditure -whether aggregated or disaggregated -on economic growth have over-relied on a panel data analysis, especially in the earlier studies. However, in the recent past, time-series based methodologies have gained traction -which is commendable since time-series methodologies provide results that are country-specific.
This study has also revealed that as economists become desperate in concluding the government expenditure-economic growth debate, they are increasingly disaggregating 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, based on the studies reviewed, the scale tilts towards a positive impact. Of all the reviewed studies, only eight studies found government expenditure to have no significant impact on economic growth. Seventeen studies had evidence that government spending is not good for economic growth. Most of the studies, twenty-one of them, attested to the positive impact of government expenditure on economic growth. Based on the results of the study, although the hypothesis that government expenditure has a positive impact on economic growth cannot be entirely accepted, it can be largely accepted.
The policy implication of these results is that there is a greater chance that the impact of government spending can lead to the growth of the real sector, especially when expenditure is on growth-enhancing activities such as domestic public investment that crowds-in private investment -such as targeted economic infrastructure development. However, for specificcountry outcomes, specific research on the impact of government expenditure on economic growth is recommended for tailor-made results and precise policy direction and implementation.
Although this review takes into account all the relevant studies on the impact of public expenditure on economic growth, future studies may benefit from splitting public expenditure into social spending and economic spending and clearly review the impact of each type of public expenditure on economic growth. It would be interesting to note if the results vary that much or whether they will be more or less the same within each category of government spending.