Public Expenditure and Economic Growth: Estimation of Impact at the Local Level in Cities of Ecuador

Public spending and economic growth are analyzed from a global context, with productive dynamism, leading to an important separation between current spending (government operations) and investment spending (infrastructure). This investigation contributes to the vast amount of information and examines the correlation between public expenditure and economic growth at Ecuador's subnational level, using a panel of 19 cities from 2007-2019. A fixed-effects panel data standard estimates the influence of current and investment spending on the growth of per capita Gross Value Added. The results show that, in line with endogenous growth theory, public expenditure progressively and significantly affects economic growth. However, significant heterogeneity is observed in the effects of expenditures according to city size, with investment spending being more critical in larger cities and current expenditures in smaller towns. These findings highlight the importance of designing local fiscal policies adapted to each city's specific characteristics and promoting sustainable economic growth.