Causality for the government budget and economic growth

Abstract

We use a panel of 155 countries for the period 1970 to 2010 to study the (two-way) causality between government spending, revenue and growth. Our results suggest the existence of weak evidence supporting causality from expenditures or revenues to GDP per capita and provide evidence supporting Wagner’s law.

Keywords:

• government expenditures
• goverment revenues
• panel causality
• GMM

JEL Classification:

• C23
• E62
• H50

Notes

¹ An often-quoted fact, ‘Wagner’s law’, about the long-run tendency for public expenditure to grow relative to some national income aggregate such as GDP (due to Wagner in 1883).

²  Total government expenditures and revenues (% GDP) were converted to nominal levels, deflated using the CPI and scaled by population.

³  In our setting, the SYS-GMM uses the standard moment conditions, while SYS-GMM-1 (modified 1) only uses the lagged first differences of dated t-2 (and earlier) as instruments in levels and SYS-GMM-2 (modified 2) only uses lagged first differences of dated t-2 (and earlier) as instruments in levels.

⁴  Under the null, is asymptotically distributed as where r is the number of restrictions.

⁵  See Bond and Windmeijer (2005).

⁶ Approximate SE estimate for this long-run effect computed using the Delta method.