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In this paper the authors test whether a reallocation of government budget items can enhance long-term GDP growth in a set of European countries. They apply modern panel data techniques to the period 1970-2006, and they use three alternative dependent variables in a growth regression: economic growth, total factor productivity and labour productivity. The results are able to identify also the distortions induced by public expenditure in the private factors allocation. In particular, they detect a strong crowding-in effect associated to public investment, which have enhanced economic growth by boosting private investment. They also associate a significant dependence of productivity on public expenditure on education as well as the role of social security and health issues in growth and the labour market.
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