The Effects Of The Composition Of Government Expenditure On Long-Run Economic Growth

With the increasing ratio of government expenditure to GDP, government plays a more important role in keeping long-run economic growth. Compared with the size of government expenditure, the composition of government expenditure is more essential. Because we can improve economic growth by optimizing the composition of government expenditure, under the condition of maintaining the scale of government expenditure. The author tries to analyze the relationship between the composition of government expenditure and long-run economic growth from both theoretical and empirical aspects.First, this paper summarizes the literature about the relationship between government expenditure and economic growth, which does not give a definite perspective. Second, this article analyzes the mechanics of the composition of government expenditure on long-run economic growth by setting one-sector and two-sector endogenous growth model containing government expenditure. The theoretical analysis suggests that the effects of various government expenditure on long-run economic growth presents as "Laffer curve", and also depends on the size of representative family's intertemporal substitution elasticity of consumption. Thirdly, this thesis uses VAR approach to analyze the effects of the composition of government on long-run economic growth based on annual data for the period from 1952-2006 in china. The empirical research suggests that the composition of government expenditure of China is not reasonable. The excessive proportion of economic construction and administrative expense and the insufficiency of social, cultural and educational development and national defense will reduce the efficiency of economy. Finally, according to the empirical research, this paper gives some policy suggestions on how to adjust the composition of government expenditure.