The relationship between public spending and happines: A study on developed and developing countries

Happiness has been detabed since ancient times in history Although research in this area initially focused only on psychology due to its association it gradually attrected the attention of economics/public finance. Richard Easterlin's extensive research on the relationship between happiness and income, particularly within developed nations, led to the identification of the phenomenon now known as the Easterlin Paradox. He found that, although cross-sectional data consistently show that individuals with higher incomes report greater happiness, longitudinal data indicate that national average happiness does not increase over time, even as average incomes continue to rise. The aim of this study is to examine the validity of the Easterlin Paradox in the context of public expenditure and happiness. In this study, the income variable in the paradox has been replaced with public spending. Additionally, the paradox has been adapted to a Kuznets Curve framework: the model treats happiness as the dependent variable and public expenditure as the independent variable, with inflation and openness to trade included as control variables. The dataset spans the period from 2005 to 2019 and classifies countries into two groups: developed (G20 and G8) and emerging (E7) economies. According to the study's findings, the relationship between public expenditure and happiness follows a similar pattern in both the G20 and G8 countries. In each group, the association adheres to an inverted-U shape, consistent with the Easterlin Paradox. Specifically, increases in public spending initially have a positive effect on happiness, until a certain threshold is reached; beyond that point, further increases in public expenditure exert a negative impact on well-being. In terms of control variables, inflation has a negative effect on happiness, whereas openness to trade exerts a positive influence. The estimated threshold for public expenditure is approximately 41.5% of GDP for G20 countries and around 39% for G8 countries. In the case of E7 countries, the relationship between public expenditure and happiness exhibits a U-shaped curve, diverging from the Easterlin Paradox observed in developed nations. Initially, low levels of public spending do not significantly enhance individual happiness. However, as public expenditure increases, a positive impact on happiness is observed beyond a certain threshold. This suggests that in developing countries, the benefits of public spending on well-being become more pronounced as spending levels rise. Regarding control variables, inflation negatively affects happiness, while openness to trade does not have a statistically significant impact. The estimated threshold for public expenditure in E7 countries is approximately 12% of GDP.