Public Spending and Long-Run Growth in Practice: Concepts, Tools, and Evidence
89
Table 2.4 summarizes the effects of two components of current expenditure: wages and spending on other goods and services. It is interesting to note that although Gupta et al. (2005) find negative effects of current expenditure in general, they find positive effects of deficit-financed spending on other goods and services but negative effects of spending on wages. Ghosh and Gregoriou (2008) also find positive effects of spending on other goods and services, but, in contrast to Gupta et al., they consider composition effects. Table 2.5 summarizes the growth effects of expenditure disaggregated by function or sector, including education spending, health spending, and infrastructure investment. Overall, the results with respect to sectoral expenditure seem to be less robust across and within studies, and it is less likely that they can be generalized compared with the expenditure aggregates considered in the previous tables. Whereas broad expenditure categories are likely to be approximately similar, expenditure categories that are more narrowly defined may differ across countries. This would imply that measurement error is more problematic when estimating the effects of functionally disaggregated expenditures in cross-country studies. However, it is also difficult to compare the estimates because the offsetting category differs across the studies. In this sense, the differences in the coefficient estimates again highlight the importance of considering the government budget constraint. Different public spending categories may also differ in terms of their lag structure. For example, public spending on road infrastructure might affect growth over very different time horizons, when compared with public spending on education (often requiring longer periods of time to show effects). Because there is little robust evidence of the growth effects of particular public spending categories and because public spending lags are usually taken into account by using multiyear averages (as explained earlier), the existing empirical studies are of little value in uncovering the specific lag structure of different public spending categories. Whereas these estimates refer to the effects of intersectoral expenditure composition, the article by Devarajan, Swaroop, and Zou (1996) is the only one that also investigates the growth effects of intrasectoral composition in the health and education sectors. However, when they include subsectoral expenditure categories in the analysis, they hold neither total nor sectoral expenditure constant, so the offsetting change is unclear. We therefore chose to exclude them from the summary tables. Gupta et al. (2005) and Yan and Gong (2009) also estimate the effects of additional expenditure categories, including interest payments, transfers,