Journal of Global Economics

Government Spending and Economic Growth: Contemporary Literature Review

Abstract

Mohammed Alqadi and Suraya Ismail

This article reviews the theoretical and empirical literature on the relationship between government spending and economic growth. The article aims to add to the current debate on this relationship. The article finds that neither the theoretical literature nor the empirical literature provides conclusive evidence about the nature of this relationship. The theoretical literature can be divided into six schools of thought: the neutral impact (Ricardian Equivalence Hypothesis), the impact runs from the economic growth to government spending (Wagner’s Law), the positive impact (Keynesians School), the negative impact (Neo-Classical School), the positive effect under condition (Barro’s School), and the nonlinear impact. Although the majority of empirical studies support the positive impact, there is a growing of empirical evidence of the nonlinearity. Overall, the theoretical and empirical literature yield inconclusive results due to a set of various factors such as the selection of the sample of countries, the level of development of countries, the time frames, the control variables included, the methodology used. Thus, the most advanced methods should be employed in future research to reach more reliable results.