A Multivariate Approach to the Growth of Governments

The Italian general government expenditure is empirically modeled by considering demand-side, supply-side, and institutional factors. The authors estimate a long-run relationship with government expenditure driven by the demand-side and supply-side effects of domestic income and bureaucratic power, respectively, as well as by an institutional factor, namely, the decentralization of public expenditure. The disequilibrium error positively affects income growth and local spending, implying that when government expenditure is above its equilibrium level, both economic growth and local governments benefit. However, tighter government spending within the European Monetary Union environment suggests that local governments will have to become more efficient to find additional resources for their financing.