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Ever since the 1930s, economic crises have been common around the world. This was the case particularly with the developing economies going through trade and financial liberalization in the post-1980 period; however it has become the case also for the developed economies with the current crisis ongoing since 2007. With every crisis, economists seek the proper way to smooth out the deterioration of economic balance. For some economists, crises – including recessions – can be overcome through liberal economic policies that have to do with private sector efforts. On the other hand some economists think that state intervention is more than necessary in times of economic crises. For these economists who are for state interventionist policies, government has the means to help economy recover in times of crises. Accordingly, government spending is therefore an influential tool for recovery.
Government spending is classified into three parts. One of them is government acquisition of goods and services to satisfy the needs of individuals and / or society known to be government final consumption spending. The other one is acquisition of goods and services in order to supply benefits for the future, mostly related to infrastructure investments, known to be government gross capital formation, where acquisition of goods and services can be realized by the production of the government. Government expenditures that are not about acquisition of goods and services, but do cover transferring of money as in the case of social security payments, are known to be transfer payments. Government final consumption spending and government gross capital formation make up the largest items in gross domestic product (GDP) of an economy.
All these three types of spending can be financed through taxation, seignorage and government borrowing. Government final consumption spending and government gross capital formation make up the largest items in gross domestic product (GDP) of an economy. Governments can attempt to stimulate economies in times of stagnation, crises or recession through government spending. There are examples of efficient fiscal stimuli through increased government spending to help economies recover from recession like the spending that occurred during 1930s to help the United States out of recession.
On the other hand, there might be cases that fiscal stimuli may not be efficient compared to expectations. It was John Maynard Keynes, who first thought that government spending could be an efficient fiscal tool who led to the use of term known to be Keynesian economics in time[1]. According to Keynesian (and to some extent post-Keynesian) economics, increased government spending is expected to increase aggregate demand, and therefore raise consumption that will stimulate the economy as a whole. On the other hand, classical economists do not like government intervention; however they approve it to a certain extent. Neo-classical economists think that government intervention should not be an alternative for recovery in times of economic recession. For neo-classical economists, in the short run government spending can provide stimulus to aggregate supply. However, they argue that the long run effects will be negative and that also even if the economy is not intervened to function through its own mechanisms; it will recover through the competitive price dynamics.
Economic recession stands for business cycle contraction implying a general slowdown regarding economic activities over a determined period of time. Macroeconomic indicators such as GDP, capacity utilization, profitability and profits of companies, incomes of households, investment spending and naturally employment all go down and / or decrease during times of recession. Moreover bankruptcies and unemployment goes up during recessionary times.
In brief, this paper will be about the investigation of the impact of the government spending through fiscal stimulus on economic recessions. Accordingly, answers to some questions in conjunction with the recession-related topics shall be sought, while the emphasis will be on the relationship between the government spending and the process of recovery from economic recessions. Empirical evidence, as well as past data regarding fiscal stimuli used to revive economies in times of recession will be analyzed so as to understand and serve the hypothesis of the paper, which is “A package of fiscal stimulus through increased government spending can be an effective means to stabilize the economy in the short run.”
- 1. Literature Review on the Relationship between Recession and Government Spending
This section goes through the literature on the relationship between government spending and recession. The section consists of three parts, first part deals with studies that find government spending to be ineffective during times of recession; second part is about the studies that find government spending to be effective. The last subsection consists of studies that claim that government spending during times of recession can be effective or ineffective depending on the conditions.
1.1. Studies that Find Government Spending to be Ineffective During Times of Recession
There are no clear relationships proven by economists regarding the effects of government spending on growth including times of recession. On the other hand, there are a number of findings that provide support for a negative relationship between economic recovery and government spending in the long run. For instance, government spending had an adverse effect on the economy of the United States of America (the U.S.) for the period between 1970 and 1995, which included some economic crisis times for the U.S. such as the oil shock of the 1970s.[2] The state of the recession experienced in the U.S. in 1990 – 1991 was triggered as a result of a consumption shock along 1990 – 1991, which was directly affected by the U.S. attack against Iraq during those years. Although government spending was high along 1990 and 1992 thanks to the military expenditures on the rise; the recovery from the recession was rather slow.[3] Although Blanchard (1993) does not say it directly, it can be seen from this analysis that government spending might not have direct effects on growth specifically related to the mood and confidence of customers. In case of Israel, her economy for the 1952 – 1965 periods, the exogenous military factors were also thought to be much effective, which was highly dependent on government spending to survive for the pre-1970 period.[4]
From a similar point of view, Fölster and Henrekson (2001) have found that enlarged public expenditures had a negative effect on growth for some rich economies for the 1970 – 1995 periods. Government consumption had adverse effects on economic growth for 98 countries that were analyzed for the 1960 – 1985 period.[5] Government consumption usually slowed down economic growth pace of economies.[6] The cross country data for the period between 1960 and 1985, showed that the ratio of imported to domestically produced capital goods in the composition of investment has had a significant positive effect on per capita income growth rates especially in developing countries.[7] Using an endogenous growth model of an open economy, Lee (1995) found that government consumption of economic output was directly related to slower growth.
Developed economies such as the U.S. economy might put great emphasis on grants-in-aid as part of government spending during economic recession times along 1960 – 1985, with some exceptions. Battaglini and Coate (2008) have recently analyzed the behavior of fiscal policies related to government spending; where they thought that a cyclical behavior for fiscal policy could be exist. Battaglini and Coate (2008) have found that government debt usually went up during economic growth times, while they went down during recessions, resembling government spending trends that are down during recessionary times, as well. Government size had an essential role on economic growth, meaning the larger the government the higher unemployment rates for the OECD economies analyzed for 1970 – 1999 period.[8] Through analysis of OECD countries for 1975 – 1998 periods found that the ratio of government spending to GDP was going up at times of recession through government consumption, transfers, subsidies and capital expenditures, although there are no clear evidences that such an increase eventually leads to recovery from recession.[9] A study on a sample of 92 countries and a sample of OECD countries concluded that the more volatile the economies, the less growth pace they have. Additionally, if governments tried to stabilize the volatility through increased government spending, there is more possibility that there will be a recession. The study outcome depicted that government spending to stimulate or stabilize the economy did not give the desired results.[10]
There also exists a negative relationship between economic growth and government spending in the recessionary post-war situations. This was finding of a study that analyzed 113 countries.[11] Another study carried on 59 middle income countries analyzed for 1960 – 1985 period also showed a similar relationship. However, the negative effects of government spending were three times stronger for socialist economies compared to other economies that were analyzed. This finding could be a denominator of the need for efficiency for government spending, for government spending in non-socialist countries does not give so negative results comparatively.[12]. Fall in fixed investment was also found to be the main reason for the economic recession in the USA economy despite the growth in government spending in the second half of the 1940 – 1950 periods. [13]
The studies exemplified in this section have the following common characteristics:
– They were usually carried out for the period between 1960 – 1995;
– They do not directly show that government spending has adverse effects for recovery from recession; nevertheless its negative effects usually stemming from inefficient allocation and use of sources do depict a negative relationship between government spending and recovery from a recession.
– There are exceptional cases like the military situation in Israel, or the direct vulnerability of the U.S. economy from global conditions due to the size of the economy, or the post World War II period in the United States, which still point that government spending is far from being effective for recovery.
– Less developed economies are less responsive to efforts to help end recession through government spending.
1.2. Studies That Find Government Spending Effective in Times of Recession
Despite the widely accepted mainstream idea that government spending to boost economic growth during times of recession is not effective, there are studies that imply a positive relationship between economic growth and government spending as well. For instance, crowding out and rent seeking concerns can be overestimated and that the effects of public investments on growth could be positive.[14] Additionally, government spending could be effective for economies, specifically on the levels of output.[15] Moreover, there are many studies that have shown the efficiency of government spending on education resulting with economic growth. However, this is usually long-run growth phenomena less related with recessionary times. [16]
Government spending on capital formation, development assistance, private investment and trade-openness has positive effect on economic growth.[17] A study that analyzed 19 OECD countries for the period 1970 to 2002 found that increased government spending through expansionary fiscal policies could be more effective during times of recession, compared to times of economic expansion. It was also found that this effect was felt more deeply in economies where consumer credit depth is less comparatively. [18]
On the other hand, neglecting government spending as an option to boost economic growth and to recover from recessions might lead to worse situations. [19] Kormendi and Meguire (1990) have shown that the government policies that were applied by the British government in 1930 and 1980s contrasted with each other. While policies that were applied in 1930 were partially useful and they were demand-side policies that necessitated government support and spending; it was just the opposite case during 1980s. Although economic parameters have shown slight recovery due to increased privatization and less government interference in the economy during recession times in Britain in 1980s, this was done at the cost of unemployment policies that led to poverty of millions in the country.
Also, the economic parameters were still shaky in 1990s despite reduced government intervention in time. As a result, government supported economic development boosted by government spending is still a requirement for economies.[20] Pollin (2002) has analyzed the state of the U.S. economy from the end of 1990s to 2001. The recessionary period observed by Pollin (2002) was partially overcome thanks to increased government spending. However, these expenditures owed much to the money collected by local and national governments in 1990s and they were consumed to help economy boost. Moreover, increased military spending due to expenditures made after September 11 terror attacks and before the war with Afghanistan were also effective to help the U.S. economy recover from recessionary situation.
The studies exemplified in this section contained supporting evidence for efficiency of government spending during times of recession with the following general characteristics:
– The studies have a Keynesian or pro-Keynesian approach to economy and income distribution. Social stability and equality of income distribution are essential for the researchers of these studies.
– The studies generally cover periods along 1970 – 2001.
– The studies also show that efficiency or inefficiency might not be directly related to government spending or private investments, which means that government spending is not to blame alone in cases of unsuccessful recovery attempts.
1.3. Studies That Find Government Spending both Effective and Ineffective with Respect to Changing Conditions in Times of Recession
In addition to positive and negative approaches to the relationship between governments spending and growth during recession times, there are some studies that do not support both but have a relative approach. Effectiveness of fiscal policies including government spending and taxation policies could turn out to have stronger effects when market actors’ expectations of economical outcomes are more accurate.[21] Also, Corsetti, Meier and Muller (2009) have analyzed the global recession of 2008 – 2009 concentrating on the case of fiscal stimulus through an analysis that investigates cross-border spillovers. When they analyze a debt-financed government spending scenario under 2008 – 2009 global recession conditions, they see that such spending leads to higher future taxation, which adversely affects private spending. In time overall spending has a decreasing tendency.
Nevertheless, government spending stimulus could come out to be effective in the short-run during recessions according to the same research, while leading to positive cross-border spillover effects by affecting long-term interest rates. Short term stimulus policies supported by government spending could be effective when they are followed by medium term consolidation plans requiring some limits on spending. Additionally, government spending had limited effects when the economy is subject to global and or foreign effects. [22].From a similar point of view, Darby (1982) point out that has shown some evidential points that are related to reasons that lead to and out of recessions. Taking 1973 – 1974 recession as an example, Darby has shown that the outside price effects caused by oil price fluctuations led to the recession, where government spending or not spending would have had little recovery effects.
Also regarding the recent global economic recession that began in 2007, Hannsgen and Papadimitriou (2009) also offer new programs that could be supported by government spending as has been the case with the New Deal program in 1930s. Despite the mainstream critical analyses of the New Deal program, which put forth that it was not effective; the new global crisis requires economists to go through the positive and negative points embedded in this program.[23] New Deal was usually seen as a failure attempt including increased government expenditure to boost economic growth and recover from recession, for it was not until the eve of World War II for the U.S. economy to start to function efficiently. However, New Deal had positive outcomes with respect to regulatory and labor relations legislation, and government spending and taxation. However, they also approve that the National Industrial Recovery Act in 1933 was administered badly and the help provided by the National Labor Relations Act of 1935 was too late for a recovery. [24]
Slight recovery from the most recent recession – that initiated with subprime crisis – would also be costly for developed economies that cannot be viewed as simple crises to be solved through monetary or fiscal expansion policies.[25] European countries should combine their efforts to help each other in the European Union, so that the Union as well as its members can recover from recession more quickly and smoothly. This can be done through fiscal policies, including government spending. On the other hand, the largest economic power of the European Union, which is Germany, is reluctant to combine efforts to help recover Union members from such a recession.[26]
Kuttner and Posen (2001) have analyzed the state of Japanese government that is prone to recession and crises since the beginning of 1990s. They argue the effectiveness of Keynesian policies that bring increased government spending with at times of recession. It is difficult to suggest that Keynesian approach to stimulate the Japanese economy was successful or not. Despite the fact that government led policies to boost the economy were not effective on a continuous basis, increased government spending has had stimulating effect on Japan’s economy when applied through multiplier effects as had been proposed by Keynes before. There are cases that the policy was far less effective than expected, but this could be stemming from some other external factors. Nevertheless, Kuttner and Posen (2001) are neutral and neither approves nor rejects the usefulness of increased government spending to recover from recessions.
In a different approach regarding the effects of government spending, Lopez, Galinato, and Islam (2009) have gone through the effects of increased governmental spending during times of recession on air pollution. Just as the uncertain effects of the increased governmental spending on economies during recessionary times, Lopez, Galinato, and Islam (2009) have found that increased government spending had no clear positive or negative effects on environmental conditions and pollution.
There might be even cases that increased government spending leads to temporary recessions. This situation can take place when interest rates have aggregate supply-side effects prior to and during increased government spending periods. On the other hand, this relationship is usually less clear as the demand and supply effects of interest rates cannot be clearly analyzed through a consisted framework, which prevents a comparison of these effects. Government spending could be causes of recession through directly affecting market interest rates at times.[27]
Boosting economies through government spending at times of recession could give different results depending on the state and size of the economy that is in recession. An analysis of 56 countries as well as G-7 countries to understand the effects of taxation and government spending policies at times of expansion and recession concluded that government spending is usually down, while taxes are up during times of recession in developing countries, which is not the case for developed (G-7) countries.[28] Similarly, government spending usually increases and taxes go down during times of economic expansion in developing countries, which is just the opposite in G-7 countries. The difference between these two types of effects related to fiscal policies could be a result of the different tax bases in these countries highly volatile tax base in developing countries, compared to the developed economies. [29]
- 3. Conclusive Remarks
This review on the relationship between increased government spending and (recovery from) recession aimed to go through the pros and cons of government intervention in the economy through increased spending during times of recession. As is clear from the previous studies, there is no clear relationship between the two factors. There are times that increased government spending can be effective, and there are times that it cannot be deemed as effective. It seems that, success or failure of such a policy depends on a number of factors such as the state of the economy in depression (i.e. is it a developed or a developing economy), the efficiency of the use of the government spending (for infrastructure, for economy, for military reasons, etc.), and the state of external conditions (whether the recession is global, whether there are direct factors that lead to recession such as oil prices, etc.). Moreover, choice of government spending as a macroeconomic tool seems to be a political choice as well. If government chooses to increase its spending at times of recession, this means an intervention into economy. Such an interventionist policy might be useful for those supported by the government, while it might come out to be harmful for those not supported by the government; given the reality that government spending is a type of redistribution of income.
4. Proposal for Econometric Model: The Effect of Government Expenditure on Growth
This proposal will attempt to provide an econometric investigation of the economic effects of government spending on countries’ growth performance. Such an analysis can be conducted in two ways. One way is to pick up a country and carry out a time series analysis. The obvious shortcoming of such an approach is that it will not produce a general conclusion because the results will be based on the dynamics of the particular country that is chosen for the analysis. However, the debate among macroeconomists about the effects of government expenditures on growth is not country specific. In general, while Keynesian economist tend to believe in the merits of fiscal policy, classical economists either emphasise the public authorities to influence economic performance or emphasize the destabilising effects of government intervention (e.g. crowding-out effect; see for example, Barro, 1991; Blanchard, 1993). Both schools defend their ideas on the basis of certain general economic theories which are in principal applicable to all market economies. Hence, rather than the time series analysis of a single country, a cross-sectional study of many countries will be adopted to examine the effects of government spending on growth. The sample of countries will be as large as possible depending on the availability of the data. It will include both high-income and low-income countries. The main objective will be to obtain a general result about the effect of government spending.
The problem with cross-sectional analysis that corresponds to the choice of a particular country in time series analysis is picking a specific year to perform the econometric test. Moreover, according to the neo-classical thesis, cross-sectional analysis cannot capture the destabilizing effects of government intervention, which takes some time to get hold. Yet, it can be argued that economic crises provide the perfect setting to test the effectiveness of government intervention. Notice that government interventions are often assessed in terms of two distinct influences. The first is the government’s impact on long-run growth. In other words, can government help to sustainable growth in the long-run. The second economic role assumed by government involvement is the counter-cyclical effect. For example, governments tend to resort to expansionary policies in case of recession.
The pro-government side of the debate (Keynesians) emphasises the key role public sector can play during recessions. In other words, the crux of the debate is whether governments should intervene to create economic stimulus in case of slowing economic activity. A similar debate arose during the recent global crisis that erupted in 2007-2008 in the financial systems of advanced capitalist economies (Economist, 2010). Thus this study will attempt to provide a cross-sectional examination of the effectiveness of expansionary fiscal policy during the recent global crisis in creating growth.
The method of ordinary least squares will be used to estimate the following cross-sectional model:
GROWTH = α + β1 GOVSPEND + β2 GOVINV + β3 PRINV + β4 OPEN + β5 RINT
Where
GROWTH = the log change of the real growth rate.
GOVSPEND = the ratio of government consumption spending and transfers to GDP
GOVINV = the ratio of government investment spending to GDP
PRIINV = the ratio of private investment spending to GDP
OPEN = the ratio of exports plus imports of goods and services to GDP
RINT = real interest rate, estimated by the difference between the interest rates on government bonds and inflation rate measured by the consumer price index
The model distinguishes two types of government expenditures. GOVSPEND measures the total amount of non-investment expenditures (as a ratio of GDP) which includes consumption spending of the public sector as well as the transfer payments. GOVINV, on the other hand, measures total investment spending of the government at the local and central levels. The objective of introducing separate measures for government expenditure is distinguishing between two principal ways in which the treasury departments inject funds into the economy to foster growth.
Two key additions will be made to the model presented above. First, note that government spending and investment may have lagged effect on growth; that is, it takes some time until this influence becomes effective. Hence lagged values of government spending and private investment will be added to the model as explanatory variables depending on the availability of data as well as the explanatory power of these additions. Also, to take account of region-dependent effects on growth rates, dummy variables will be introduced as control variables. Regional dummies will be determined based on the analysis of the data. A dummy variable for each region with remarkable (positive or negative) growth performance will be added.
According to the Keynesian economists, both coefficients of government expenditures (β1 and β2) are expected to be positive. The size of the coefficients may indicate which form of government spending is more effective on growth. A classical economist, on the other hand, would argue that the coefficients should be either statistically not significant (i.e. government spending has no effect on growth) or negative (if, for example, increased government spending crowds-out private investment and thus lowers growth potential of the economy). The empirical results may indicate which approach is more powerful in explaining the effect of government intervention during the recent crisis.
There are three control variables in the model, each accounting for factors that are frequently discussed in the literature as being influential on growth. Private investment is expected to encourage increased levels of economic activity. For classical economists, it is the only sustainable way of growth. Keynesians, on the hand, argue that private investment will remain low during recessions; this is why the government needs to step in. Openness is expected to create a rise in GDP, especially under globalisation. However, note that openness may also limit and even reduce growth rates if the economy in question relies on export-led growth and there is a slowing world demand. Real interest rate is included in the regression equation to take account of the monetary policy. For example, central banks of all major economies, including the US, UK and Eurozone, lowered their lending rate as a response to recession. In others words, if monetary policy is effective the coefficient of RINT should be negative (i.e. higher interest rates causing low growth).
The cross-sectional model is adopted by the model used by Kelly (1997). Notice that the model in this study is constructed to test the short term effectiveness of government spending; hence, variables such as education spending, health expenditures are left out of Kelly’s model. Moreover, real interest rates are included to take account of monetary policy because in many countries expansionary fiscal and monetary policy have been implemented together to fight recession. The cross-section model will use the 2009 numbers. World Development Indicators (WDI) published by the World Bank will be used as the main data source.
The model will be also estimated separately for high-income (OECD) countries and low income countries to test if the level of income or development influences the effectiveness of government intervention. Also Chow test will be used to check if there is a structural break between those two types of countries with respect to fiscal policy effects.
5. Preliminary Analysis:
5.1. The Effect of Government Spending on Macroeconomic Variables
This part of the essay will discuss the effect of government spending on macroeconomic variables such as economic growth, unemployment and private investment. To evaluate the impact of government spending, the trends in forty European countries in 2008 period will be examined. Note that the global financial crisis was triggered by the outburst of the boom in the US housing market in the summer of 2007 and it quickly spread to the entire global financial system during the second half of 2007 and 2008.[30] Many European economies were severely affected by the crisis. As a result, the average annual growth rate of the countries in the sample declined by almost 60 percent from 4.81 to 2 percent. Table 1 presents the growth performance of the continent between 2005 and 2008. Note that the growth performance of the continent is largely improved by the countries in the East. For example, in 2008, the highest growth rate attained by a West European country belongs to Holland, which is below the average: only 1.71.
| Average Annual Change in Real GDP (%) | |
| 2005 | 4.26 |
| 2006 | 5.02 |
| 2007 | 4.81 |
| 2008 | 2.00 |
Table 1. Growth in Europe (2005-2008)
The following sections will present a brief descriptive analysis of the relationship between government spending and key macroeconomic variables including GDP growth, private sector investment, unemployment and inflation. The analysis will be based on scatter diagrams and correlation coefficients.
5.2. Government Expenditure and Growth
Figure 1
Figure 1 exhibits the correlation between government spending and economic growth in Europe during 2008. The scatter diagram seems to indicate a negative relationship. As the ratio of government spending in GDP rises, the growth performance seems to deteriorate. Correlation between two variables (estimated as -0.3138 verifies this indication) appears to verify this conclusion.
Figure 2
Figure 2 is drawn to have a better look at the cross sectional evidence between growth and government spending. The difference of Figure 2 is that it depicts the association between growth and the log change in government spending during 2009 (that is, from its 2008 value). In this diagram, the negative relationship is even more observable (World Development Indicators published by World Bank were used as the data source in this paper).
Note that correlation coefficient does not imply causality. Hence it cannot be concluded, by looking at the cross sectional evidence for 2008, government spending has adversely affected economic performance. For example, it might be the case that government spending is higher in troubled economies (low or negative growth) because governments in those countries had felt a more urgent need to step in.
To sum up, as for the relationship between growth and government spending, two different causalities can be maintained. According to the first, government spending may contribute or adversely affect economic growth. Pro-intervention Keynesian economists argue for the former; classical economists tend to the latter interpretation (Mankiw, 2002). Yet another interpretation is that the causality runs from growth to government spending, not the other way round. Accordingly, governments tend to increase their spending as a counter-cyclical tool in times of economic slowdown (i.e. when there is little or negative growth; Krugman, 2009); hence, there should be a negative correlation between two variables.
5.3. Government Expenditure and Private Investment
The so called “crowding-out effect” is the adverse effect of government spending on economic growth. Rising government spending tends to increase interest rates by creating excess demand for loanable funds; high interest rate discourages private investment.[31]
Figure 3
Figure 3 presents the scatter plot of government spending and private investment, both as a percentage of GDP, in forty European countries in 2008. Similar to the case of economic growth, investment seems to be inversely related to government spending. Low investment is associated with high government spending and vice versa. This observation is confirmed by the correlation coefficient (-0.282).
5.5. Government Expenditure and Inflation
The relationship between inflation (measured by the GDP deflator), and government spending is one of the fierce debates among economists. Anti-government classical economists (e.g. monetarists) argue that government spending is bound to cause inflation in the long-term.[32] A similar argument is made for the current crisis. Some economists raised their concerns about the inflation threat that may show up due to fiscal stimulus programs designed to fight the recession (Greenspan, 2009).
Figure 4
Figure 4 presents the scatter plot of government spending and inflation, measured by the GDP deflator. There does not seem to be a strong relationship between the two as indicated by the dots scattered around without a clear-cut trend. In other words, government spending does not seem to be associated with high rates of inflation. In fact, the correlation coefficient is slightly negative but its magnitude is close to zero: -0.139.
However, this result is maybe not surprising because it takes some time for the inflationary effects of government spending to be effective. Many economists agree that expansionary fiscal policy may generate inflation in the long-run.[33] To test this idea, the level of government spending of 2007 is compared with inflation of 2008, showed in Figure 5.
Figure 5
Again no relationship is observed. Again, the correlation coefficient is -0.059, indicating virtually no link between 2007 fiscal policy and 2008 inflation.
Regression Analysis
Using the regression function discussed above:
GROWTH = α + β1 GOVSPEND + β2 GOVINV + β3 PRINV + β4 OPEN + β5 RINT , the following graph can be obtained
This shows that GDP increase lead to increase in per capita index which is an indication of increase in government spending has positive effect on the economic growth which is depicted by the increase in per capita index. Although, correlation analysis showed that there exists no clear relationship between the government spending and economic recovery, it is clear in this case, government spending is positively related to economic recovery since the line of the best fit slopes upward.
Conclusion
This work seeks to determine the effects of government spending on economic recovery growth in recessions. It consults various studies which were previously done by other scholars. It is evident that government spending is likely to have mixed effects to the economy. There is no clear indication that government spending is likely to lead to economic recovery from the recessions. The crowding effect of government spending also limits the effectiveness of government spending in ensuring economic recovery. Global economic conditions are also another key aspect that determines the success of government spending in recovering from the recession. A less relationship between the government spending was also noticed. Investment was also found to be inversely related to government spending. On the other hand, it cannot be ruled out that government spending has no positive effect on economic growth as shown by the regression graph.
Government spending cannot on its own be a sure way in ensuring economic recovery and growth from recession. It is only through combining both fiscal and monetary policies focus on empowering the private sector involvement in economic activities that economic recovery from recession may be achieved.
