Pathways to sustainable development: How financial development shapes the impact of government spending

This study examines the impact of government spending on sustainable development and the moderating role of financial development using a panel dataset of 45 developing countries (2002–2023) and the Panel-ARDL model with the PMG estimator. Robustness checks include CS-ARDL, FMOLS, DOLS, and MMQR. The findings confirm a positive and significant effect of government spending on sustainability, which strengthens at higher sustainability levels. Financial development also enhances sustainability but with diminishing returns. Notably, the interaction between government spending and financial development is negative and significant, suggesting that higher financial development weakens the positive impact of public spending. These results underscore the complex dynamics between fiscal policy and financial development in achieving sustainability. Policymakers should align government spending strategies with financial maturity to optimize sustainable development outcomes.