Final version A New Framework for Testing the Effect of Government Spending on Growth and Productivity*

Abstract: Does government spending have a positive or negative effect on economic growth? The results of earlier empirical stud-ies give mixed results. In this study we suggest a new method for testing the effect of different kinds of government expendi-ture on productivity growth in the private sector. The focus on productivity in the private sector and the use of disaggregated data makes it possible to avoid or mitigate a number of method-ological problems. The major conclusions, which are quite ro-bust, are that government transfers, consumption and total out-lays have consistently negative effects, while educational ex-penditure has a positive effect, and government investment has no effect on private productivity growth. The impact is also found to work solely through total factor productivity and not via the marginal productivity of labor and capital