The spending behavior of government through the lenses of global uncertainty and economic integration

Abstract

This article contributes to the literature dealing with fiscal policy’s drivers and the effects of the globalization on public sectors. By using the level and the volatility of the global economic policy uncertainty (EPU) and the US economic policy uncertainty, we examine the total government expenditures for a sample of 113 countries over the period 1997-2014. We observe that higher global uncertainty levels significantly increased the public spending at global level while the volatility of the global uncertainty has an insignificantly positive effect. Notably, these results are stronger for the low and middle-income economies. We also observe that the influence of the global uncertainty on public spending in the low and middle-income economies are exacerbated by the economic integration (provided through trade openness) while in high income economies, it is an opposite trend. These findings show that what the existing literature labels as ‘efficiency hypothesis’ and ‘compensation hypothesis’ can actually be combined and that this combination depends on the global uncertainty, at least of low, middle-and upper-income economies. This observation also shows that economic integration can act as a diversifying factor for high-income economies rejecting the current growing protectionism observed in some of these countries. Beyond these findings, our study paves a way for future research study on the impacts of global uncertainty on fiscal policy, the public expenditure and tax revenue.