Government Spending and Debt's Impact on Economic Growth in High-Income and Low-Income Countries

Abstract

The information in this study looks at how government spending and debt affect economic growth in High-Income Countries (HICs) and Heavily Indebted Poor Countries (HIPCs) from 2002 to 2021. The study uses Two-Stage Least Squares (2SLS) econometric estimation with a rolling window method to deal with possible endogeneity problems. The results show both what the two groups have in common and what makes them different. The negative effect of debt on growth is the same for both HICs and HIPCs, but their growth causes are very different. HICs depend on things like trade openness, inflation, human capital, financial growth, and how well the government works. HIPCs, on the other hand, focus more on trade openness, inflation, and governance, especially voice and accountability. Both groups' progress is slowed down by government spending, which could be because it blocks private investment and wastes money. The quality of governance has a bigger effect on the growth of HICs than it does on HIPCs. Both groups are affected by government debt and spending in different ways. HIPCs are affected more severely because their institutions and financial systems are not as strong. These results suggest specific ways for the government to handle its debt and spending. They stress the need for responsible fiscal policies and focused investments to help the economy grow while dealing with problems caused by debt. These findings also show how important it is for all countries, no matter what their economic situation is, to keep their debt levels low as a preventative step for long-term economic growth and fiscal stability.