Public Expenditure and Economic Growth in the Republic of Kosovo - Empirical Evidence

• Author: Lumnije Thaçi - Arbnora Gërxhaliu
• Position: Faculty of Mechanical and Computer Engineering, Department of Economic Engineering, University of Mitrovica 'Isa Boletini', Kosovo - Candidate of the Society of Certified Accountants and Auditors in Kosovo (SCAAK)
• Pages: 38-58

Vol. 4 No. 1

January, 2020

European Journal of Economics, Law and Social Sciences

IIPCCL Publishing, Graz-Austria

ISSN 2519-1284

Acces online at www.iipccl.org

38

Public Expenditure and Economic Growth in the Republic of Kosovo -

Empirical Evidence

Ass. Prof. Dr. Lumn e Thaçi

Faculty of Mechanical and Computer Engineering, Department of Economic Engineering,

University of Mitrovica "Isa Boletini", Kosovo

Mrs. Arbnora Gërxhaliu

Candidate of the Society of Certifi ed Accountants and Auditors in Kosovo (SCAAK)

Abstract

In developing countries, it is still a controversial issue whether or not public spending can

a ect economic growth or not. Therefore, to enrich the literature on this phenomenon, the

purpose of this paper is to study the impact of total public expenditure on economic growth

and development in the Republic of Kosovo using secondary data from 2008 - 2018. Multiple

regression model will be used for data analysis. The results of the analysis show that total

government spending has a negative and non-signifi cant impact on economic growth in the

country. Also, GDP has a weak negative correlation with public spending. In this research

we have also disaggregated the data by dividing total public expenditures into current

expenditures and total capital expenditures, where both indicators, current expenditures

and total capital expenditures have a negative and insignifi cant impact on economic growth.

The data analysis also shows that GDP has a weak and negative correlation with current

expenditure and total capital expenditure, while there is a positive but very weak correlation

between current expenditure and capital expenditure. For public spending to have a positive

e ect, they must be used productively, using sector funds that are considered most important

by policy-makers for the country's economic development.

Keywords: Total government expenditure, current expenditure, capital expenditure, economic

growth, developing countries, developed countries.

1. Introduction

James Buchanan, concluded that public fi nances study the economic activity of the

government as an entity (socially-economic). He advocates that the science of public

fi nances must contain two stages: the fi rst stage defi nes what the government`s goals

are and how e cient are its e orts in achieving them; the second stage defi ned

behavioural changes of individuals in private or market economy (Păun, Brezeanu,

2013).

The government's role is increasing almost in all economic system. Public expenditure

in real terms can be used as an indicator of the size of government activities fi nanced

by the Government public revenue in modern secular states generally consists of

two types, namely the current budget and the capital budget. Current budget is

used to meet the expenditure on aspects of civil administration, defence, the cost of

servicing the debt, and more, while the capital budget is usedfor the construction of

infrastructure, educational institutions, health facilities, telecommunications, defence

European Journal of Economics, Law and Social Sciences

IIPCCL Publishing, Graz-Austria

Vol. 4 No. 1

January, 2020

ISSN 2519-1284

Acces online at www.iipccl.org

39

projects, dams, canals, power plants, highways, and train. (Jaelani, 2018).

At the most aggregated level, the composition of public expenditures has an impact

on the output of the public sector and its economy-wide outcome. The composition

of public spending a ects the performance of the public sector (output) through

several channels. First, a high share of non-discretionary expenditures limits the

room for manoeuvre of the government and consequently reduces the possibility

to have a well-targeted economic policy. Second, the composition of expenditures

reveals the priority se ing of an economy, e.g. when a large share of spending is

devoted to future-oriented areas such as education and R&D. Finally, it allows to

draw conclusions on the focus of the State on its Musgravian functions (stabilisation,

growth, adjustment) (Mandel, Dierx, A lzkovitz, 2008).

There are two main hypotheses related to real government expenditures and growth.

The Wagner’s hypothesis argues that growth of an economy leads more government

spending

while the Keynes’s hypothesis proposes that government expenditures feed higher

economic growth. From policy perspectives, Keynesian view gives a dominant role

in government intervention for higher growth while Wagner view gives just a passive

role to the government in economic policy. E ects of resource allocation between

public and private sectors have been subjects of many studies. On the one hand,

Wagner’s hypothesis states that growth of an economy leads people to demand more

public goods which in return cause higher government expenditures. On the other

hand, the Keynesian hypothesis states that expansionary government expenditures

improve economic growth (Gumus, Mammadov, 2019).

Economic theory does not automatically generate strong conclusions about the e ect

of government expenditure on economic performance. Indeed, most economists

would agree that there are circumstances in which lower levels of government

spending would enhance economic growth and other circumstances in which higher

levels of government spending would be desirable. Economic theory is important in

providing a framework for understanding how the world works, but evidence helps

to determine which economic theory is most accurate (Mitchell, 2005).

The substantial growth of the size of government expenditures in both the developed

and developing nations since World War II, and its e ect(s) on long-run economic

growth (or vice versa), has spawned a vast literature that o ers diverse a empts to

explain the observed phenomenon. (Loizides, Vamvoukas, 2005).

The uncertainties raised in the external environment during 2018 appear to have

also a ected the dynamics of the economy of the Republic of Kosovo, although the

real GDP growth is estimated to have been similar to the previous year. The slower

economic growth in the Eurozone and Kosovo's main trading partners in 2018 and the

dynamics of the domestic economy resulted in the deterioration of the country's net

exports position. Consequently, although the macroeconomic environment appears

to have been stable, real GDP growth, according to CBK estimates, stands at 4.0%

(Figure 1). The increase in aggregate demand during 2018 is mainly driven by the

increase in consumption and investment. During the reporting period, the increase of

new investment loans and capital expenditures by the Government led to an increase

in investments in the country by 14.4%. (FSR, 2019).