ASSESSMENT OF THE GOVERNMENT EXPENDITURE EFFECT ON WELFARE OF SOCIETY

Abstract

This study gets into the challenge of exploring how government expenditure influences social welfare and offers insights into optimizing public spending to enhance it. The primary objective was twofold: firstly, to devise a methodology for evaluating how government spending affects social welfare of society, and secondly, to conduct an empirical investigation to pinpoint the level of government expenditure that maximizes it. The article introduces a method for appraising welfare of society based on an extended concept, accompanied by a model for quantifying the extent of government expenditure's influence on welfare. After establishing the non-linear nature of the effect of government expenditure and considering the developed evaluation methodology for social welfare, both general and functional government spending are optimized. For the matter, 122 econometric models were formulated to appraise the impact of both general and functional government expenditures on welfare of society. These models serve to validate or reject the research hypothesis encompassing the possibility of decreasing marginal effect of government expenditure. Drawing from the outcomes of the study encompassing clusters I and II of EU countries, depending on both size of the government and GDP per capita, it was evident that 87 econometric models corroborate the non-linear effect of government spending on welfare of society. Cluster I countries within the EU displayed a U-shaped pattern in terms of government spending's impact on welfare of society, while countries in cluster II exhibited an inverted U-shaped effect.