Composition of Public Expenditure and Growth: Is there a Nexus?

This paper investigates the effects of the composition of public spending together with the impact of fiscal decentralization on growth for a set of four Central European countries over the period from 1995 to 2010. The main contribution to the current literature arises from the fact that for the first time, this paper examines a possible common trend of the variables which may lead to misleading results if left untreated. Indeed, most variables suffered from this problem. The interpretation of obtained results must therefore take this issue into account. We found that expenditure on education and defence seems to have positive and significant impact on economic growth. On the contrary, economic affairs consistently exhibit a negative and significant impact on the growth rate. In addition, fiscal decentralization seems to be beneficial for economic growth of the concerned countries. Furthermore, the implication of a strong negative impact of economic affairs is robust regarding different specifications, and especially with respect to the common trend issue.