Some scholars have argued that increase in government spending can be an effective tool to stimulate aggregate demand for a stagnant economy and to bring about crowed-in effects on private sector. According to Keynesian view, government could reverse economic downturns by borrowing money from the private sector and then returning the money to the private sector through various spending programs. High levels of government consumption are likely to increase employment, profitability and investment via multiplier effects on aggregate demand. Thus, government expenditure, even of a recurrent nature, can contribute positively to economic growth. On the other hand, endogenous growth models such as Barro (1990), predict that only those productive government expenditures will positively affect the long run growth rate. In the neoclassical growth model of Solow (1956), productive government expenditure may affect the incentive to invest in human or physical capital, but in the long-run this affects only the equilibrium factor ratios, not the growth rate, although in general there will be transitional growth effects. Others have argued that increase in government expenditures may not have its intended salutary effect in developing countries, given their high and often unstable levels of public debt. The government consumption crowd-out private investments, dampens economic stimulus in short run and reduces capital accumulation in the long run. Vedder and Gallaway (1998) argued that as government expenditures grow incessantly, the law of diminishing returns begins operating and beyond some point further increase in government expenditures contributes to economic stagnation and decline. Various empirical studies on the relationship between government expenditure and economic growth also arrived at different and even conflicting results. Some studies suggest that increase in government expenditure on socio-economic and physical infrastructures impact on long run growth rate. For instance, government expenditure on health and education raises that productivity of labour and increase the growth of national output. Similarly, expenditure on infrastructure such as road, power etc. reduces production costs, increase private sector investment and profitability of firms, thus ensuring economic growth (Barro, 1990; Barro and Sali-i-Martin, 1992; Roux, 1994; Okojie, 1995; Morrison and Schwartz, 1996). 2010).
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