The widely held assumption that high government expenditure in areas such as education can have a positive impact on GDP growth is challenged by economist Brian Sturgess in Not Paved With Gold: Government ‘Investment’ Does Not Equal Growth.
This study is the first investigation on the correlation between the composition of public expenditure and economic growth in developed economies. This new research, based on OECD data for 19 developed economies for which consistent data is available, shows that:
- government spending on education as a proportion of GDP had no discernible correlation with real GDP economic growth.
- there is a strongly negative and statistically significant correlation between spending on health and real GDP growth: “In other words the more money spent on health, the lower the rate of economic growth”.
- there is an even stronger negative correlation between spending on welfare programmes and economic growth.
In addition, Sturgess finds that, contrary to expectations, analysis of spending on road infrastructure – one of the main categories of public capital expenditure and an area seen by politicians of all sides as ‘investment’ – also had a negative relationship with real GDP growth for 29 OECD countries.
Tim Knox, Director of the Centre for Policy Studies, comments:
Health, education, and welfare account for about two thirds of total public expenditure in these countries. Yet this new research indicates that this spending is holding back economic growth. If politicians continue to talk about spending in these areas as an “investment”, then the data suggest that they are getting an extremely poor return on that investment.