Report on the Effect Between Debt, Budget Composition and Growth

Tasks

The research question of this project is twofold:
(1)    How do public expenditures and public debt influence economic development?
(2)    Does the effect from (1) vary between different public budget items?

Methods

To answer this question, we first discuss the current scientific literature on the interactions between public debt, budget composition and economic growth, before turning to a descriptive analysis of the development of public debt and selected budget items in OECD countries. We then assess research questions (1) and (2) empirically. Following the current literature on empirical economic growth research, we specify dynamic panel data models.

Data and other sources

COFOG („Classification of the functions of government“) data from the OECD, Penn World Tables, Eurostat

Results

The study examines the relationship between public debt, measures to consolidate public budgets and economic growth. The composition of the public budget and the growth effects of individual budget categories is investigated in detail. The study compares the size of the individual government expenditure categories in Germany with the budget composition of the other EU member states. This comparison shows that Germany spends above-average shares of its public budget for social protection and healthcare. Spending on education, transport, environmental protection, and defense is lower than in comparable European countries. The empirical analysis shows that government debt and economic growth are negatively correlated, and that budget consolidation over expenditure cuts is preferable to consolidation through tax hikes. Consumptive expenditure is negatively associated with growth and thus provides room for growth-friendly consolidation. Research and development expenditure and expenditure on education tend to be positively correlated with growth.