The size and composition of government expenditure

Abstract

This paper tests several leading hypotheses on determinants of government expenditure. The purpose is to avoid omitted variables bias by testing the prominent theories in a comprehensive specification, to identify persistent puzzles for the current set of theories, and to explore those puzzles in greater depth by looking at the composition of government expenditure and the level of government at which it takes place as well as its magnitude. Using Global Financial Statistics data from the IMF covering over 100 countries from 1970-2000, I look at cross-sectional and inter-temporal variation in government expenditure and both individual categories of expenditure (such as defense, education, health care) and different levels of government (central, state, and local). Among other results, I find a new explanation for Wagner's Law, widespread evidence that preference heterogeneity leads to decentralization rather than outright decreases in expenditures, that a great deal of the expenditure associated with increased trade openness is not in categories that explicitly insure for risk, and evidence that both political access and income inequality affect the extent of social insurance. * I am endebted to Romain Wacziarg for multiple readings and to two anonymous referees for thorough and insightful comments.

Ideology and redistribution through public spending

“…Related studies have focused on specific spending categories or the determinants of the composition of public spending. These studies are mostly based on cross-sectional data analysis and have underscored the importance of differences in the political institutional settings (e.g., Tabellini 1999, Persson et al 2007), income distribution Richards 1981, Shelton 2007), or ethnical fractionalization (Alesina et al 1999, Shelton 2007 to explain cross-country differences in public spending patterns. 5 However, once such types of 'country-specific factors' are allowed for, the impact of different ideological positions of governments in different countries can be hardly distinguished in cross-sectional studies.…”

Globalization, welfare regimes and social protection expenditures in Western and Eastern European countries

“…Usually a country's openness to trade and foreign direct investment (FDI) or some compound globalization measure (see Table 1 in Gemmel et al (2008); Adam and Kamas (2007); Görg et al (2007); Potrafke (2009)) is used to proxy the globalization phenomenon. Recently, several papers also analyze the impact globalization has on the composition of government expenditures by jointly relating various components of public expenditures to proxies for globalization (see Dreher et al (2008a); Gemmel et al (2008); Sanz and Velazquez (2007); Shelton (2007)). …”

Volatility and growth: Governments are key

“…b IVs are regressors exclusively used in the growth equation. c Control variables from Shelton (2007): GDP (lngdpi,t−1), trade openness (lnopeni,t−1), and population size (lnpopi,t−1). d IVs are regressors exclusively used in the government size equation.…”

“…lngov i,t−1 accounts for government size of the previous year. Z i,t−1 is a vector containing the remaining control variables of the literature, as summarized by Shelton (2007). Among these are income (lngdp), openness to trade (lnopen), and population size (lnpop).…”

“…Levine and Renelt (1992) and Mirestean and Tsangarides (2009): Investment (lninvi,t−1), GDP (lngdpi,t−1), population growth (popgri,t−1), life expectancy (lnlif ei,t−1), openness to trade (lnopeni,t−1), and inflation (lninf li,t−1) c Control variables from Shelton (2007): GDP (lngdpi,t−1), openness to trade (lnopeni,t−1), and population size (lnpopi,t−1).…”