Government spending and economic growth, III

14 Aug 2012 by Jim Fickett.

An IMF study suggests that increased government spending during a recession can improve the following recovery. However the relationship is rather weak and, if debt is high, increased spending can even result in a worse recovery instead of a better one.

The April 2009 World Economic Outlook from the IMF included a chapter specifically addressing the question of whether governments should expect good results from attempting monetary and fiscal stimulus following the crisis.

Here are the two key graphs. The bottom half of the first graph shows that a 15% increase in government consumption might result in about a 2.5 percentage point increase in GDP in the year following the recession. And the correlation is not very strong – many points are far from the regression line.

The second graph shows that if a country has debt higher than about 60% of GDP, the effect of additional spending is as likely to be negative as positive. (US debt was well above this threshold even when the last recession began.)

It is difficult to fully evaluate these results, as the methodology is not given in any detail. However it is noteworthy that an organization which strongly urged governments to use stimulus still found only a weak, and sometimes even a negative, relationship with growth.