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Composition of government expenditure and economic growth

Objective

Most studies on growth emphasize that increasing human capital is critical for explaining economic growth. There is a wide consensus that education plays a key role in creating human capital, and since the government is responsible for the majority of investments in education, one can relate the accumulation of human capital to government spending.

At the same time, given the limited amount of resources available to the government, many countries face important tradeoffs between education and investment in infrastructures. The aim of this research is twofold. First, we develop a model of economic growth to explore the possibility that government expenditure can enhance economic productivity in two alternative ways: raising the productivity of physical capital or by raising the productivity of human capital. An essential feature of our analysis is the introduction of government spending in the process of human capital accumulation, which is widely accepted but generally ignored. Second, we estimate the theoretical model developed in stage one.

The goal is to get an estimate for the returns on public and human capital, thus helping governments evaluate the impact of their policies. The issues raised by this research are central not only to the European debate of real convergence, but also to the debate on how to classify public investment in the context of the Stability and Growth Pact (SGP). In the first case, the European structural funds aim at co-financing a series of government programs concerning not only in vestment in infrastructures, but also human capital. In the second case there is the issue of the deficit constraints specified in the SGP. Therefore, it is relevant to provide a qualitative as well as a quantitative measure of the impact of both types of spending on the growth performance of the receiving economies.

Field of science

  • /social sciences/economics and business/economics/production economics/productivity

Call for proposal

FP6-2004-MOBILITY-12
See other projects for this call

Funding Scheme

EIF - Marie Curie actions-Intra-European Fellowships

Coordinator

UNIVERSITY OF YORK
Address
Heslington
York
United Kingdom