Social expenditure and economic growth: Evidence from Australia and New Zealand using cointegration and causality tests

Developed nations, especially Nordic countries such as Iceland, Sweden, Norway, Denmark and Finland allocate a sizeable portion of their budget for social welfare. On the contrary, developing counties’ allocation for social welfare has been negligible. The question is: can state intervention through social welfare provisions ensure sustained economic growth? In other words, do social expenditures promote economic growth? This study seeks to answer this question by establishing links between social expenditures and economic growth in Australia and New Zealand, and draw lessons for fast developing ASEAN economies as they aspire to be developed nations soon. Using annual data from 1980 to 2012, we deploy cointegration and error correction methods for establishing long-run relationship between social expenditures and economic growth. We conduct Granger causality tests for testing short-term direction of causality among the variables. For Australia, economic growth is found to have three main determinants- education, health and social expenditures. For New Zealand, health and social expenditures have been found as the main determinants of growth. However, no long-run relationship could be established among the variables when we included budget deficit in our model. The Granger causality tests indicate that one way causality running from economic growth to health expenditure, and social expenditure to economic growth in Australia. In case of New Zealand, on the other hand, one-way causality runs from education expenditure to economic growth, health expenditure to education expenditure, economic growth to health expenditure, and education expenditure to budget deficit. Social welfare expenditures also Granger cause economic growth. Our findings suggest that social expenditures promoted growth in Australia and New Zealand. The fast developing economies such as Singapore and Malaysia, which aim to achieve the developed country status by 2020 and usually do not allocate sizeable portion of their budget for social welfare, should adopt more ‘generous’ social policies for the sake of a balanced development.