The purpose of this study is to analyse the short-run and long-run relationships existing between income and two of the largest categories of social spending: health and education expenditure. According to the endogenous growth theory social expenditure might contribute the formation of human capital and thus stimulate growth. In spite of that, in the recent years we have observed a reduction in social spending due to the austerity measures that have been implemented. If the effect of education and health expenditure affects output then it is of great importance to establish the consequences of these types of measures. On the other hand, the capacity of spending in health and education is constrained by the income so that the reductions in social spending might also be the consequence of adjustments to lower levels of income. The scope of the analysis is to assess the existence, the direction and the intensity of the causal effect. In order to empirically address this issue we collected data from World development Indicators (World Bank) and OECD Health database for 9 OECD countries from 1970 to 2014. This study applies the ARDL approach to cointegration developed by Pesaran et al. (2001) and Pesaran and Shin (1999). We find 9 cointegration relationships indicating that in the long-run an equilibrium exists. In particular, income is a strong determinant of education and health expenditure. This indicates that health and income have a strongly consumption component even in the long-run. The only exception is Norway where social expenditure significantly promotes growth. On the opposite, social expenditure has a predominantly negative influence on income in the short-run. According to the literature this could be due to the crowding-out of other productive expenditure possibilities.
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Bellelli, Francesco Saverio
MSc Financial Economics
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