The relationship between public expenditure and economic growth

Public expenditure for the purpose of fulfilling social needs is of major importance to all countries, especially in terms of social welfare. Considering the increase in the public expenditure over time, the direction of the relationship between public expenditure and economic growth is crucial for policymakers and researchers. Two different theoretical frameworks, Wagner's Law and Keynes' hypothesis, interpret the relationship between public expenditure and economic growth from different perspectives. Wagner (1883) claimed that economic growth encourages public expenditure, while Keynes (1936) claimed that public expenditure encourages economic growth. This study examined the relationship between public expenditure and economic growth using data from 1994–2017 for G20 countries and data from 2000–2016 for Turkey in an analysis conducted with panel data. The findings of the study indicated that Keynes' Hypothesis is more valid than Wagner's Law in G20 countries while both Wagner's Law and Keynes' Hypothesis are valid in Turkey. Accordingly, public expenditure can be used as a political tool to achieve economic growth in G20 countries. On the other hand, public expenditure can be used as an economic policy tool during periods of recession in Turkey in addition to using it for financial discipline and stopping economic instability by controlling the economic growth rate during inflationary periods.