A NEW FRAMEWORK FOR TESTING THE EFFECT OF GOVERNMENT SPENDING ON GROWTH AND PRODUCTIVITY

Does government spending have a positive or negative effect on economi c growth? The results of earlier empirical studies give mixed results. In this study we suggest a new method for testing the effect of diffe rent kinds of government expenditure on productivity growth in the pri vate sector. The focus on productivity in the private sector and the u se of disaggregated data makes it possible to avoid or mitigate a numb er of methodological problems. The major conclusions, which are quite robust, are that government transfers, consumption and total outlays h ave consistently negative effects, while educational expenditure has a positive effect, and government investment has no effect on private p roductivity growth. The impact is also found to work solely through to tal factor productivity and not via the marginal productivity of labor and capital.