Government spending decomposition: priorities toward anchoring higher growth

This paper uses vector autoregressive models to investigate which government spending category has been more beneficial for private economic growth in the short and long run. To that end, the analysis considers a longtime horizon to detect contemporaneous and lagged cyclical effects of government spending and underlying components on the economy as well as common trends over time. Moreover, the paper demonstrates how the Egyptian government managed to frequently increase the current expenditure ratios in the state budget, and the economic consequences of such increases on private activity. More specifically, the paper explores the extent to which government spending categories played a role in enhancing private investment and hence contributed indirectly to private economic growth. The paper arrives at the following conclusions. First, the effect of the various government expenditure ratios on economic growth is generally weak. In contrast, the effect of private investment on growth is dominant. Second, while the magnitude of the relationship between fiscal policy variables and private investment is generally small, the accumulated effect of higher government purchases of goods and services on private investment is relatively high. Third, the paper confirms the observation that the government frequently reduced the government investment ratio to accommodate the increases in the current expenditure ratios which negatively affected economic growth. Priorities for fiscal policies should aim at reducing the deficit and restructuring the budget to create better space for targeted spending in support of inclusive economic growth.