Impact of Government Spending on Private Consumption and on the Economy: Case of Thailand

Authors: Paitoon Kraipornsak

Abstract:

The recent global financial problem urges government to play role in stimulating the economy due to the fact that private sector has little ability to purchase during the recession. A concerned question is whether the increased government spending crowds out private consumption and whether it helps stimulate the economy. If the government spending policy is effective; the private consumption is expected to increase and can compensate the recent extra government expense. In this study, the government spending is categorized into government consumption spending and government capital spending. The study firstly examines consumer consumption along the line with the demand function in microeconomic theory. Three categories of private consumption are used in the study. Those are food consumption, non food consumption, and services consumption. The dynamic Almost Ideal Demand System of the three categories of the private consumption is estimated using the Vector Error Correction Mechanism model. The estimated model indicates the substituting effects (negative impacts) of the government consumption spending on budget shares of private non food consumption and of the government capital spending on budget share of private food consumption, respectively. Nevertheless the result does not necessarily indicate whether the negative effects of changes in the budget shares of the non food and the food consumption means fallen total private consumption. Microeconomic consumer demand analysis clearly indicates changes in component structure of aggregate expenditure in the economy as a result of the government spending policy. The macroeconomic concept of aggregate demand comprising consumption, investment, government spending (the government consumption spending and the government capital spending), export, and import are used to estimate for their relationship using the Vector Error Correction Mechanism model. The macroeconomic study found no effect of the government capital spending on either the private consumption or the growth of GDP while the government consumption spending has negative effect on the growth of GDP. Therefore no crowding out effect of the government spending is found on the private consumption but it is ineffective and even inefficient expenditure as found reducing growth of the GDP in the context of Thailand.

Keywords: government consumption spending, governmentcapital spending, private consumption on food, non food, andservices, Vector Error Correction Mechanism, Almost Ideal DemandSystem, substitution effect, complementary effect, consumer demand, aggregate demand

Digital Object Identifier (DOI): doi.org/10.5281/zenodo.1070973

References:

[1] Pieroni, L. 2009. "Does Defend Expenditure Affect Private Consumption? Evidence from the United States", Economic Modelling, 26: 1300-1309.
[2] Deaton, A.S., and Muellbauer, J., 1980. An Almost Ideal Demand System, American Economic Review, 70, 312 - 326.
[3] Akmal, M. and Stern, D.I., 2001. "The Structure of Australian Residential Energy Demand", Working Papers in Ecological Economics no. 0101, The Australian National University.
[4] Anderson, G. and Blundell, R., 1983. Testing Restrictions in a Flexible Dynamic Demand System: An Application to Consumer Demand in Canada, Review of Economic Studies, 50, pp. 397-410.
[5] Blundell, R. 1988. "Consumer Behaviour: Theory and Empirical Evidence- -A Survey", The Economic Journal. 98 (389), pp. 16-65.
[6] Pesaran, M.H. and Y. Shin, 1999. "Long Run Structural Modelling", DAE Working Paper No. 9419. University of Cambridge.
[7] Tridimas, G.,2000. "The Analysis of Consumer Demand in Greece. Model Selection and dynamic Specification", Economic Modelling 17: 455-471.
[8] Woodford, M. "Simple Analytics of the Government Expenditure Multiplier", NBER Working Paper No. 15714, January 2010.
[9] Fatas, A. and Mihov, I., 2001. The Effects of Fiscal Policy on Consumption and Employment: Theory and Evidence. CEPR Discussion Paper no. 2760.
[10] Blanchard, O. and Perotti, R., 1999. "An Empirical Characterization of the Dynamic Effects of Changes in Government Spending and Taxes on Output". NBER Working Paper no. 2685.
[11] Heppke-Falk, K.H., Tenhofen, J., and Wolff, G.B. 2006. "The Macroeconomic Effects of Exogenous Fiscal Policy Shocks in Germany: A Disaggregate SVAR Analysis", Discussion Paper Series 1, Economic Studies, no. 41, Deutsche Bundesbank.
[12] Werner, R.A. 2004. "Why has Fiscal Policy Disappointed in Japan- Revisiting the Pre-Keynesian View on the Ineffectiveness of Fiscal Policy", Sophia University and University of Southampton, available online at accessed on 8 February 2010.
[13] Capet, S., 2004. "The Efficiency of Fiscal Policies: A Survey of the Literature. CEPII Working Paper, no. 2004/11. Sepatember.