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NAŠE GOSPODARSTVO / OUR ECONOMY 68 (2) 2022 Cenc, H.
Government Expenditure and Economic Growth in Euro 
Area Countries
Helena Cenc
University of Maribor, Faculty of Economics and Business, Razlagova ulica 14, 2000 Maribor, Slovenia
helena.cenc@student.um.si
                        
ARTICLE INFO
         
Original Scientific Article
Article History:
Received May 2022
Revised June 2022
Accepted June 2022
         
JEL Classification:
C23
E62
H41
H50
         
Keywords:
Government expenditure
Economic growth
Euro area
Panel data
         
UDK: 330.34:336.5
DOI: 10.2478/ngoe-2022-0008
         
Cite this article as: Cenc, H. (2022). 
Government Expenditure and Economic 
Growth in Euro Area Countries. Naše 
Gospodarstvo/Our Economy, 68(2),  19-27. 
DOI: 10.2478/ngoe-2022-0008. 
         
©2022 The Authors. Published by 
Sciendo on behalf of University of 
Maribor, Faculty of Economics and 
Business, Slovenia. This is an open access 
article under the CC BY-NC-ND license 
(http://creativecommons.org/licenses/
by-nc-nd/4.0/). 
         
Abstract
In this article, the author examines the impact of government expenditure 
on economic growth. A review of empirical studies shows that researchers 
have found a negative link between government spending and economic 
growth in most cases. This paper is based on yearly data between 1995 and 
2020 in euro area countries, with the application of linear regression on 
panel data. The main purpose is to determine whether government spending 
affects economic growth and, if so, how. Based on the econometrics model 
applied, the author established that in panel data, government expenditure 
has a negative impact on economic growth, more precisely, if government 
spending as a share of GDP increases by 1%, economic growth decreases 
by 0.509%. In addition, there is a significant negative relationship between 
government expenditure and economic growth for each country as well as 
the entire panel. 
Introduction
With the development of humankind, the understanding of economic 
processes changed and different economic thoughts were formed, thus the 
views of economists on the role of the state in economic development were 
also modified. While classic and neoclassic economists were more inclined to 
the state not interfering in the economy and the fact that it is the free market 
that takes care of the allocation of resources, Keynesians and neo-Keynesians 
advocated an active role of the state, i.e. the state actively participates in 
the market and enters into the role of a demander when there is insufficient 
demand from the private sector. 
Nowadays, however, it is common knowledge that the market is full of 
anomalies, and fiscal interventions are necessary because market failures occur 
in even the most efficient markets. There are several different types of market 
failures, such as the existence of public goods, externalities and monopolies, 
which are one of the forms of imperfect competition in the market (Pindyck & 
Rubinfeld, 2013). 
19

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NAŠE GOSPODARSTVO / OUR ECONOMY 68 (2) 2022 Cenc, H.
By shaping economic development while regulating 
economic growth, governments are helping to prevent 
economic crises or at least mitigate their effects. One 
of the frequent aims of economic policy measures is to 
reduce income inequality among members of society by 
redistributing income and providing goods and services of 
wider public interest. It is important that economic policy 
has a stabilising effect. However, government spending 
always raises questions about its effectiveness. It is often the 
case that government expenditure ends up in investments 
that prove to be unproductive, which is also emphasised 
by critics of fiscal interventionism, such as Milton Friedman 
(Brue & Grant, 2013). 
The main purpose of this paper is to use a selected model 
to assess the impact of government spending on economic 
growth in euro area countries (Austria, Belgium, Cyprus, 
Estonia, Finland, France, Greece, Ireland, Italy, Latvia, 
Lithuania, Luxembourg, Malta, Germany, the Netherlands, 
Portugal, the Slovak Republic, Slovenia, Spain). The author 
decided to conduct the research on euro area countries 
because they have the same currency and monetary policy 
within the European Central Bank.  
There are always conflicting opinions when talking about 
the role of governments in economic development. Classical 
economists believe that a free and competitive market 
would ensure efficient production, trade and distribution. 
The economy is therefore self-sufficient and strives for full 
employment without government interference. However, it 
is up to the government to provide the basis for a free market 
so that it can function. The government must thus ensure 
the protection of property rights, the physical protection 
of citizens and accessible education, thus ensuring public 
education (Brue & Grant, 2013, p. 51-53). Members of the 
Keynesian economic thought, however, oppose this belief, as 
they believe that governments should actively participate in 
the market. The active role of government in the economy 
means that governments increase their spending or reduce 
taxes to combat recession. Government spending would 
boost economic growth through multiplier effects and lower 
taxes would indirectly increase private consumption. On the 
contrary, the government should pursue a restrictive fiscal 
policy in times of economic prosperity, thus preventing the 
economy from overheating (Samuelson & Nordhaus, 2010, 
p. 437-449). Keynes (1957, p. 21-30) also repeatedly pointed 
out that changes in aggregate demand, whether anticipated 
or not, have a major impact on the economy in the short 
term. That is why fiscal interventions in the economy are 
necessary, at least in the short term, and the short term 
is long enough for fiscal interventions to have significant 
consequences for the economy. However, this is opposed by 
the new classical school of economic thought, which argues 
that economic policy measures are often expected and 
consequently do not lead to the desired effects. There are no 
real effects of the government measures because consumers 
incorporate their expectations into their economic activity 
(Lucas & Sargent, 1981, p. 55-62). However, this is not 
always the case. The new Keynesians determined that even 
anticipated shocks lead to real effects, and the reason for 
this lies in price and wage rigidity (Stiglitz, 1984).
On the one hand, it is evident that government spending 
with multiplier effects can contribute to economic growth. 
Government spending is also necessary to address market 
failures such as public goods, externalities and monopolies, 
to redistribute income and regulate economy through 
counter-cyclical action. On the other hand, however, an 
increase in government spending can lead to negative 
effects, such as the crowding-out effect. This mainly occurs 
in expansionary fiscal policy where, through borrowing 
and rising interest rates, increased government spending 
is crowding out private investment activity. The volume of 
government borrowing can therefore go so far as to raise 
the real interest rate, which can lead to companies being 
deterred from capital investment. As projects financed 
by borrowing are too expensive after interest rates rise, 
companies are turning to foreign markets where capital is 
cheaper (Blanchard & Johnson, 2012, p. 94-96).
This study provides a clear overview of the link between 
government spending and economic growth for all euro 
area countries. The findings are also compared with studies 
that have already been conducted, and, on this basis, in the 
conclusion the author has proposed measures for decision 
makers.  
In the first part of this article the author carried out a review 
of existing relevant research into the impact of government 
spending on economic growth. This is followed by a 
description of the methodology and data. The study ends 
with an overview of the results and conclusions. 
Literature Review
Several economists have already addressed the role of 
government spending in economic growth. The results of 
selected empirical studies are summarised below, and the 
details of the research are summarised in Table 1. 
Rubinson (1977) studied how the size of government 
spending affects economic growth on cross-sectional 
data from several countries. He concluded that higher 
government spending boosts economic growth, especially 
in less developed and poorer economies. Cameron 

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(1982), meanwhile, argued a positive correlation between 
government spending and economic growth. Based on 
data of 19 developed economies between 1960 and 
1979, he found that increases in government spending 
resulted in slow economic growth, higher unemployment 
or higher inflation, therefore concluding that there is 
negative correlation between government spending and 
average GDP growth. However, change is small, therefore 
government spending needs to change drastically in order 
for it to be reflected in economic growth. He also notes that, 
contrary to conventional macroeconomic theory, high levels 
of spending do not cause stagflation. 
Both Cameron (1982) and Landau (1983) concluded that 
there is a negative correlation between government 
spending and economic growth. Cameron’s research was 
based on data of 100 countries between 1961 and 1976. 
Even though he claimed that there is a negative correlation 
between government spending and a growth in GDP, he 
emphasises that there is no significant negative correlation 
between the share of government expenditure in GDP 
and real GDP growth per capita among less developed 
economies. Cameron assumes that this is result of non-
investment in education, which has consequently led to a 
slow-down in economic growth. 
In his research, Marlow (1986) tested the hypothesis that 
increasing government spending is detrimental to economic 
growth. In a sample of 19 industrialised countries, he found 
that the increase in government spending between 1960 
and 1980 was inversely related to economic growth. The 
findings of his research also showed that shrinking the 
private sector not only threatens future economic growth 
but also limits the future ability of the public sector to 
efficiently use private resources. 
Grier and Tullock (1989) conducted their research on a 
panel which included 113 countries in the period between 
1951 and 1980. They studied the empirical laws of post-war 
economic growth, pointing out that the value of the 
estimated coefficients varies between different groups of 
countries. In three out of the four groups of countries, they 
perceived a negative connection between real GDP growth 
and the growth rate of government expenditure. 
For 98 countries in the period between 1960 and 1985, a 
negative connection between real per capita GDP growth 
and the share of government spending in GDP was also 
found by Barro (1991). At the same time, he noted that 
public investments themself have a low link to economic 
growth. Although countries with higher human capital 
have lower fertility rates, they have a higher share of 
physical investments in GDP. Based on Barro’s economic 
growth model, Hsieh and Kon (1994) formed a study 
to determine the nature of the relationship between 
government expenditure and economic growth, by 
examining intermediate interactions between real GDP 
per capita growth rate, public spending and private 
investment in GDP. The sample covered the G7 countries. 
The results of the survey showed that the relationship 
between government spending and economic growth 
can change significantly over time. Another important 
finding is that there is no consistent evidence that 
government spending could increase GDP per capita. Lin 
(1994) also dealt with the time component of the impact 
of government expenditure on economic growth, albeit 
his study only focused on the nature of the connection 
over the short and medium term. His findings point to the 
fact that government spending has a positive effect on 
economic growth in the short term, while in the medium 
term (25 years) it has no effect on economic growth. 
Sheehey (1993), unlike other authors, examined whether 
the nature of the link between government expenditure 
and economic growth is affected by the size of government 
expenditure. He tested the hypothesis that the impact of 
government spending on economic growth is fundamentally 
positive, however, as government spending increases, the 
positive impact becomes weaker or even negative. The 
results of his study support this claim, as he proves that the 
impact of government spending on GDP growth is initially 
positive. The results supporting this claim were significant 
for poor countries and those whose government expenditure 
represents a low share of GDP. For countries with a large 
share of government expenditure in GDP, as well as for rich 
countries, there is already a significant negative correlation, 
regardless of the size of government expenditure. This is 
because government expenditure in rich and developed 
countries is usually higher than in poor countries. Sheehey 
(1993) concluded that if government spending exceeds 15% 
of GDP, the link between the size of government spending 
and economic growth becomes negative. 
Due to the increase in government expenditure in Greece 
as well as the decline in economic growth, the hypothesis 
of the connection between GDP growth and government 
expenditure was also tested by Basil (2000). An econometric 
analysis reveals that there is a negative relationship 
between the size of government spending and economic 
growth in Greece. One of the reasons for this empirical 
outcome seems to be inefficient and unproductive activities 
financed by public funds. 
Since the vivid negative relationship between government 
expenditure and economic growth is distinctive mainly 
for rich countries with large public sectors, Fölster and 

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Table 1
Literature review
Authors Data Conclusions
Rubinson (1977)
Cross-section data (several 
samples from 7 to 91 
countries) 
A larger government size stimulates economic growth by 
reducing dependence, especially in poorer, less developed 
countries.
Cameron (1982) Cross-section (19 countries)
Increases in government spending result in lower economic 
growth, higher unemployment, increases in deficits and 
inflation.
Landau (1983)
Panel data (over 100 
countries)
A negative relationship between the growth rate of real per 
capita GDP and the share of government expenditure in GDP.
Marlow (1986) Panel data (48 countries)
A negative relationship between the growth rate of real per 
capita GDP and the share of government expenditure in GDP.
Grier and Tullock (1989) Panel data (113 countries)
A negative relationship between the GDP growth rate and that 
of the government share of expenditure in GDP. 
Barro (1991) Panel data (98 countries)
A negative relationship between GDP growth and the share of 
government expenditure in GDP.
Sheehey (1993)
Cross-section data (20 OECD 
countries)
The relationship between government expenditure and 
economic growth differ according to the size of government 
expenditure. 
Henrekson (2001) conducted an econometric study on a 
panel of rich countries in the years between 1970 and 
1995. They found a robust negative correlation between 
government spending and economic growth. Dar and 
AmirKhalkhali (2002) confirmed the thesis of a negative 
link between government spending and economic growth in 
countries with a large public sector. The survey was based 
on 19 PECD countries and covered the period from 1971 to 
1999. The results showed that there is an advantage for small 
public sectors, because economic growth is relatively higher 
in countries that have fewer fiscal policy interventions, which 
cause market distortions. However, this does not mean that 
optimal fiscal policy minimises the size of the public sector. 
The authors merely note that a small public sector can be just 
as effective as a large public sector in providing legislative, 
administrative and management infrastructure. In principle, 
resource allocation is also more efficient in these countries 
and the effect of crowding out is also smaller. 
Colombier (2009), in contrast to most of the aforementioned 
researchers, reports a weak positive link between the size of 
government spending and economic growth. He claims that 
economic data are often poor quality, consequently the least 
squares method often used in research is biased and inefficient.
The author of this study also cites the study by Alfonso and 
Tovar (2011), who conducted an empirical analysis on a 
sample of 108 countries in the period from 1970 to 2008. The 
results showed a negative impact of the size of government 
spending on economic growth. They also showed that the 
negative impact is greater in countries where fiscal policy is 
less effective, and that the quality of fiscal policy increases 
with the reduction of the public sector. 
Aleksandrovich and Upadhyaya (2015) examined the 
impact of the size of government expenditure on economic 
growth in the United States, Canada and the United 
Kingdom in the period from 1975 to 2012. For Canada 
and the United Kingdom, they noted a negative impact of 
government spending on economic growth, most likely due 
to the crowding out of private sector investment. A negative 
impact of government spending on economic growth was 
also found by Pascual Sáez on panel data of EU countries 
in the period from 1990 to 2013. However, the negative 
impact is not significant in each of the individual countries. 
The authors emphasised that the relationship between 
economic growth and government expenditure can be 
positive or negative, depending on the countries included 
in the sample, the period of estimation and the variables 
that reflect the size of the public sector. 
After reviewing selected studies, the author of this study 
determined that most of the authors found that there is a 
connection between government expenditure and economic 
growth. Among the studies, there are fewer that identified 
a positive impact of government spending on economic 
growth. Common to the studies, however, is that they 
found that a positive link between government spending 
and economic growth is mainly present in poorer and less 
developed countries, and that the positive impact can go 
from positive to negative when government spending 
exceeds a certain limit. More studies conclude that, in 
principle, a smaller public sector means a better fiscal policy. 
In most of the studies reviewed, however, the authors find a 
negative link between government expenditure as a share 
of GDP and economic growth. Of course, this does not mean 
that countries should not spend to stimulate the economy. 

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However, there are situations where government spending, 
together with its multiplier effects, can have a significant 
impact on the economic situation. 
Methodology and Data
Methodology
The starting point of this empirical work is based on a study 
by Pascual Sáez et al. (2017), in which the authors examined 
the relationship between the size of government expenditure 
and economic growth. The study geographically covered 
selected European Union countries in the year 2012, namely 
Austria, Belgium, Denmark, Finland, France, Germany, Greece, 
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, 
Sweden and the United Kingdom. The survey covers the period 
from 1994 to 2012. The relationship between government 
expenditure and economic growth was first estimated using 
linear regression for each of the countries, then data by 
country and time period were combined into a panel and 
regression analysis was performed on the panel data. The 
problem identified by the researchers is that the composition 
of government expenditure varies from country to country.
Based on the theoretical framework developed by Ram 
(1986), Pascual Sáez and others (2017) assumed that the 
economy consists of two sectors, namely private and public 
(government), so the production function consists of labour 
and capital of private public sector. The study mainly focused 
on the direction of the impact of government expenditure 
on economic growth, whether government expenditure 
increases economic growth (the link is positive) or whether 
the link is negative. They considered the variable GDP 
per capita to be economic growth and used the share of 
government expenditure in GDP for government expenditure.
In the first part of the study, Pascual Sáez and others (2017) 
performed a linear regression for each individual country 
and assessed the impact of government expenditure on 
economic growth. They found that in most countries the 
link between government spending and economic growth 
is negative. The coefficients were only positive in the case 
of France, Greece, Luxembourg, Portugal and the United 
Kingdom, however, the coefficients of determination were 
also unacceptable in these countries. In the second part 
of the study, a regression analysis was performed on the 
panel data of the observed countries. The significance of the 
model was verified using an F-test – the Hausman test. The 
authors concluded that a model with fixed effects is more 
suitable for further evaluation. Assessing this model, they 
concluded that government spending is negatively linked to 
economic growth in European Union countries.
The model used for this study is based on the 
aforementioned research. By considering Ram’s (1986) 
theoretical framework, it is assumed that the economy 
consists of two sectors – private (C) and the public (G). The 
aggregate product (Y) is thus expressed as the sum of two 
expenditure groups:
Table 1
Literature review (cont.)
Hsies and Kon (1994) G7 countries
The relationship between government expenditure and 
economic growth varies over time and between countries. 
Lin (1994) Panel data (several countries)
Government spending has a positive impact on economic 
growth in the short term, but not in the medium term.
Basil (2000) Time series for Greece
A negative relationship between the size of government 
expenditure and economic growth. 
Fölster & Henrekson (2001) Panel data (29 countries)
Government expenditure has a negative impact on economic 
growth.  
Dar & AmirKhalkhali (2002)
Panel data (19 OECD 
countries) 
Government spending has a negative impact on economic 
growth.
Colombier (2009)
Panel data (21 OECD 
countries)
A stable but weak positive link between government spending 
and economic growth.
Afonso & Tovar (2011) Panel data (108 countries)
Government spending has a negative impact on economic 
growth.
Aleksandrovich & Upadhyaya 
(2015)
Panel data for the USA, the 
United Kingdom and Canada
Government spending has a negative impact on economic 
growth.
Pascual Sáez & others (2017) Panel data (EU countries)
A negative relationship between the share of government 
expenditure in GDP and the rate of GDP growth per capita.
 Source: Author’s elaboration

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Y = C + G             (1)
Based on equation (1), an econometric model is formed 
that explains economic activity through the dynamics of 
government expenditure in aggregate income:
Y
it
 = ß
0
 + ß
1
 (G ⁄ Y)
it
 + u
it
          (2)
i = 1,2,…,19,
t = 1,2,…,25.
where Y
it
 is the percentage change in GDP per capita,  (G ⁄ Y)
it
  
represents the percentage change in government 
expenditure as a share of GDP and u
it
  is an abbreviation for 
the error term. 
A regression analysis based on the least squares method 
was used to analyse the impact of government spending 
on economic growth. The corresponding assumptions of 
this method are taken into account, and by fulfilling them 
it is possible to use the best unbiased linear estimator as 
an estimator. This means that the estimators of the linear 
function are the dependent variables Y, the estimates of 
each regression coefficient are normally distributed with 
the mean equal to its population value and have minimal 
variance. For the purposes of this study a simple regression 
analysis was used in order to observe a dependent variable 
and one independent variable in the model. A 95% 
confidence level (p<0.05) was considered in all tests.
Data
The link between economic growth and government 
spending was analysed on panel data. Given the nature of 
this data, it can be argued that the inclusion of data from 
different countries over the same time period considers 
the heterogeneity of individual basic observation units. 
In addition to the aforementioned heterogeneity, data 
variability is also crucial for panel data, which enables more 
efficient estimates of regression coefficients and reduces 
the problem of multicollinearity between variables.
As the number of observations for each entity (country) is 
not the same, since not all data were available, this is an 
unbalanced panel. Data for Malta for the period from 1995 
to 1999 inclusive are missing. The number of time series in 
the panel (26) is higher than the number of cross-sectional 
data (19), therefore it can be considered a long panel.
The analysis of the impact of government expenditure 
on economic growth is based on data obtained from the 
Eurostat database. Data were obtained from a single data 
source for all countries, as this avoids possible differences in 
data processing or measurement methods (Eurostat, 2021).
For the analysis, data is required on GDP per capita and 
government expenditure in aggregate income. For data 
on GDP per capita, data on the aggregate income of an 
individual country and the population of the country were 
obtained. GDP was shown in millions of euros at constant 
2010 prices. Population data referred to the population 
situation on 1 January each year. The author of this study 
calculated the data on GDP per capita, thus ensuring 
comparability between economies.
Data on government expenditure were obtained in millions 
of euros at constant 2010 prices, and for the purposes of the 
analysis, government expenditure was then recalculated 
as a share of the GDP of each country. This process was 
also repeated for the purpose of data comparability, i.e. by 
excluding the effect of the size of the economy.
The analysis was performed on countries in the euro area, 
therefore the following countries represent the cross-section 
of the panel: Austria, Belgium, Cyprus, Estonia, Finland, France, 
Greece, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, 
Germany, the Netherlands, Portugal, Slovak Republic Slovenia 
and Spain. The time series of the panel represents the period 
from 1995 to 2020 inclusive. The time series therefore contained 
26 observations and a cross-section of 19 observations.
Results
Based on the estimated linear relationship between GDP 
growth rate per capita and government expenditure, for 
each of the euro area countries, the estimates of regression 
coefficients in all countries suggest a negative relationship. 
By considering the 95% confidence level, it was found that 
the critical value of t-statistics is 2.069. The absolute value of 
the t-statistics of each estimated regression coefficient does 
exceed the critical value, while the p value for each of these 
coefficients does not exceed 0.05, as illustrated in Table 2. 
The best result is found in Finland, where the value adjusted 
R2 0.9029, which means that the selected model explains 
as much as 90.29% of the total variance of the percentage 
change in GDP per capita based on the percentage change in 
the share of government expenditure in aggregate income.
The author of this study began by testing the significance of 
the group effects using an F-test as well as the significance 
of each coefficient using a t-test (Table 3). Using panel data, 
the model was also tested for a fixed effect or random effect. 
Using the Hausman test in Table 3, it was found that the 
model with fixed effects is more appropriate. The results are 
  .            .

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based on White’s robust standard errors for heterogeneity 
of countries, wherein it was determined that the possible 
presence of heteroskedasticity does not affect the statistical 
characteristic of regression coefficients. Evaluating the 
model using White’s robust standard errors for the time 
series characteristic, it was found that the autocorrelation 
in the model has no effect on the statistical characteristic 
of regression coefficients. By performing the above tests, 
Table 2
Estimated linear relationship between GDP growth rate per capita and government expenditure (in GDP), euro area countries 
(1996-2020), dependent variable: economic growth
Country Coefficient Std. error t-statistic p Adj. R
2
Austria -0.7669 0.0821 -9.3385 0.0000 0.7822
Belgium -0.8838 0.0939 -9.4130 0.0000 0.7849
Cyprus -0.2935 0.1075 -2.7296 0.0119 0.2118
Estonia -0.9166 0.0856 -10.7037 0.0000 0.8255
Finland -0.9352 0.0625 -14.9738 0.0000 0.9029
France -1.0471 0.0983 -10.6502 0.0000 0.8241
Greece -0.6622 0.1917 -3.4549 0.0022 0.3130
Ireland -1.0372 0.1592 -6.5166 0.0000 0.6334
Italy -0.7457 0.1108 -6.7327 0.0000 0.6488
Latvia -0.8870 0.2120 -4.1831 0.0004 0.4074
Lithuania -1.0690 0.1096 -9.7549 0.0000 0.7969
Luxembourg -0.7149 0.1006 -7.1074 0.0000 06735
Malta -0.4143 0.0833 -4.9717 0.0001 0.5552
Germany -0.7540 0.0623 -12.1213 0.0000 0.8588
The Netherlands -0.5178 0.1238 -4.1832 0.0004 0.4074
Portugal -0.7226 0.1516 -4.7670 0.0001 0.4751
Slovak Republic -0.4806 0.1312 -3.6630 0.0013 0.3410
Slovenia -0.9439 0.1329 -7.1035 0.0000 0.6733
Spain -0.7389 0.1005 -7.3505 0.0000 0.6884
Source: Author’s elaboration
Table 3
Estimates of the determinants of economic growth in the euro area countries (1996-2020). Dependent variable: economic growth
Variable Coefficient Std. error t- statistic p
Model with fixed effect
c
dG
R
2
Adj. R
2
F-statistic and Prob
1.8893
-0.5090
0.7476
0.7221
29.3457 (0.0000)
0.0988
0.0354
19.1151
-14.3496
0.0000
0.0000
Model with random effect
c
dG
R
2
Adj. R
2
F-statistic and Prob
1.8410
-0.7143
0.5528
0.5518
578.42 (0.0000)
0.2129
0.0842
8.6490
-8.4834
0.0000
0.0000
Hausman statistic and Prob 11.9356 (0.0006)
Source: Author’s elaboration

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it was determined that the fixed effect model is the most 
optimal. The estimated regression coefficient for the change 
in government expenditure is -0.509, which means that if the 
share of government expenditure in GDP increases by 1%, 
economic growth or change in GDP per capita will decrease 
by about 0.51%. This result confirms the assumption that the 
growth of the share of government expenditure in aggregate 
income has a negative impact on economic growth. 
Conclusion
In this paper the author reviewed some of the existing 
studies on the relationship between economic growth 
and government expenditure and also carried out an 
analysis. It was concluded that the relationship between 
economic growth and government expenditure can be 
positive or negative, depending on the countries included 
in the sample, the period of estimation and the variables, 
which reflect the size of government spending. In this 
study, the author first examined this relationship for each 
country of euro area alone and then for the whole panel. 
Based on the estimated linear relationship between GDP 
growth rate per capita and government expenditure, a 
negative relationship was detected between each of the 
euro area countries. The impact of government spending 
on changes in GDP may not be particularly significant, 
however, if the share of government expenditure in GDP 
increases by 1%, economic growth or change in GDP per 
capita will decrease by about 0.51%. The connection 
also turns out to be negative in the panel of euro 
area countries, whereby the assumption of negative 
relationship between GDP growth rate per capita and 
government expenditure can be confirmed. 
Focusing on the results of this study only, it can be assumed 
that government interfering in the economy has a negative 
effect on a country’s further economic growth. Based on the 
results of this study, government spending is resulting in 
decreasing economic growth in all euro area countries. Based 
on the results obtained, the author of this study suggests 
that countries should focus on strategic use of resources, 
such as in employment strategy, infrastructure, education 
and the legal system, rather than direct intervention in 
the economy, thus enabling the free market to have the 
best possible conditions for functioning. Government 
investment can sometimes turn out to be unproductive or 
even cause a crowding-out effect, therefore it is important 
for governments to identify areas and activities where their 
interfering can contribute to economic growth.
Every now and then, however, the economy finds itself in 
a situation where government intervention is needed, 
especially in the short term. Sometimes it simply cannot be 
left to the market to rebalance itself, as too much damage 
would be done in the short term. Therefore, on the one 
hand, the sacrifices caused by non-government intervention 
are simply too great to offset the damage caused by the 
government’s intervention, while on the other, countries 
must respect certain social rights of citizens. This means 
providing them with an income that provides them with a 
livelihood and social security.
It would obviously make sense for this study to be repeated 
in the aftermath of the COVID-19 crisis, considering the 
consequences of the crisis.  
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Vladni izdatki in gospodarska rast v državah evro območja
Izvleček
V tem članku preučujemo vpliv vladnih izdatkov na gospodarsko rast. Pregled empirične literature kaže, da v večini primerov 
obstaja negativna povezava med javnimi izdatki in gospodarsko rastjo. Naša raziskava temelji na podatkih držav evro 
območja v obdobje med 1995 in 2020 z uporabo ekonometrične analize panelnih podatkov. Glavni namen je ugotoviti, 
ali vladi izdatki vplivajo na gospodarsko rast, in če da, kako. Na podlagi ocene našega ekonometričnega modela panelnih 
podatkov ugotavljamo, da imajo vladni izdatki izraženi v deležu BDP negativen vpliv na gospodarsko rast, natančneje, če se 
delež vladnih izdatkov v BDP poveča za 1 %, se bo gospodarska rast zmanjšala za 0,509 %. Negativna povezava je statistično 
značilna tako za celoten panel kot tudi za vsako izmed posameznih držav. 
Ključne besede: vladni izdatki, gospodarska rast, evro območje, panelni podatki