Sub-Division Expenditures and Economic Growth in Europe Based on United Nation’s Classification of the Functions of Government

Abstract

This paper analyzes the correlation between public expenditure for each individual sector and economic growth for 30 European countries over the period 1991 to 2012 using three econometric methods – ordinary least squares, least square dummy variable and generalized method of moments. In order to test the link between government spending and economic growth, the research uses the United Nation’s Classification of the Functions of Government. By analyzing the sub-branches of public spending, we arrived at the conclusion that most of the public expenditures negatively affected economic growth.  Also, the use of dummy variables showed that the recent economic crisis has had a negative effect on the sample states. The European integration didn’t have a big influence on economy, the GDP per capita growing with only 0.03%. The impact of public expenditure on economic growth is very important nowadays because the economic system was changed by the recent events, mainly the global economic crisis, the almost economic collapse of Greece and the European Union’s ageing and debt problems.