Optimal Public Expenditure Ratio: An Application for Türkiye

Abstract

When the data of several countries are analysed, it is generally observed that the share of public sector in the economy has increased over time. In the literature, one aspect of the issue is addressed with the reasons for this increase, whereas explaining the effect of public expenditures on growth is addressed from another perspective. The existence of a non-linear relationship between public expenditure and growth raises the question of the rate at which the relationship changes the direction. This is because the growth rate will increase with the expenditures made until this rate is reached, while the growth rate will decrease if this rate is exceeded. Within the scope of this study, the validity of the Armey curve, which argues that there is a non-linear relationship between public expenditure and growth, has been tested with the data between 1991 and 2021 and the optimal public expenditure ratio has been investigated. As a result, it was found that the Armey curve is valid and the rate of public expenditure that maximises growth is approximately 12%. Therefore, it can be said that reducing public expenditures which are above the optimal ratio during the period will have a positive effect on the growth rate.

Keywords

• public expenditure
• growth rate
• armey curve