The Relationship Between Government Expenditure and Economic Growth : A Granger Causality Analysis

This thesis investigates the relationship between government expenditure and economic growth across different levels of public spending.Using Granger causality tests and regression analysis, this study analyses data from 26 European countries from 1995 to 2022.The results indicate that in countries with high government expenditure, changes in public spending Granger-cause economic growth, exhibiting a negative relationship that suggests diminishing returns at higher levels of public spending.Conversely, in countries with low government expenditure, economic growth Granger-causes changes in public spending, suggesting a positive relationship possibly driven by increased demand for public goods and higher tax revenues resulting from economic growth.No statistically significant Granger causality was found for the two middle expenditure groups or when analysing all countries collectively.This study contributes to the debate on government spending by demonstrating how the relationship between public expenditure and economic growth varies across different levels of public spending.