Analyzing the Optimal Size of Government Expenditure in Jordan: Between Theory and Practice

Abstract

Introduction: The optimal size of government expenditure is a key issue in public finance and growth theory, especially for developing economies under fiscal and structural constraints. While public spending supports public goods provision, macroeconomic stabilization, and social cohesion, excessive expansion beyond an optimal threshold can hinder growth through inefficiencies, crowding-out effects, and fiscal sustainability risks. The literature reflects this debate, ranging from Wagner’s Law and Keynesian demand-side arguments to recent endogenous growth and non-linear models that suggest an inverted-U relationship between government size and economic growth. In Jordan, government expenditure has long accounted for a high share of GDP due to structural problems and foreign shocks. Despite this, growth has remained modest alongside rising deficits and public debt, raising the question of whether spending has surpassed its growth-enhancing level. Existing empirical evidence for Jordan is limited and inconclusive. This study addresses the gap by estimating the optimal size of government expenditure using a long quarterly dataset and multiple non-linear econometric approaches, aiming to identify the growth-maximizing threshold and derive policy-relevant insights to enhance fiscal efficiency and sustainability.

Methodology: The study uses quarterly data for Jordan over the period 1976–2023 to examine the relationship between real GDP and government expenditure as a share of GDP. To account for non-linearities and threshold effects, three complementary econometric approaches are applied: the Scully model to estimate the growth-maximizing level of government expenditure within a long-run VECM framework, the Armey curve in a quadratic form using quantile regression to capture heterogeneous growth effects, and a discrete threshold regression model to identify expenditure levels at which the impact on growth changes.

Results and Discussion: Across all three methodologies, the findings converge on a clear and robust result. Government expenditure supports economic growth in Jordan up to a threshold of around 28% of GDP; beyond this level, the marginal effect of additional spending becomes statistically insignificant and then negative. The Scully model estimates an optimal expenditure ratio close to 28%, confirmed by Delta-method significance tests. Consistently, the Armey Curve yields a growth-maximizing share of about 28.4%, validating the inverted-U relationship, while the threshold regression identifies a structural break at 28%, with positive growth effects below and significantly negative effects above this level. Overall, the results indicate that Jordan’s recent average government expenditure ratio (approximately 30%) slightly exceeds the growth-enhancing optimum.

Conclusion: The results confirm a non-linear relationship between government expenditure and economic growth in Jordan, with growth weakening once spending exceeds its optimal level due to efficiency losses, crowding-out effects, and rising fiscal pressures. Rather than advocating across-the-board cuts, the findings highlight the need to improve the composition and efficiency of public spending by shifting resources toward productive investment, infrastructure, and human capital, while keeping expenditure close to its growth-enhancing level and encouraging future research to examine the effects of different spending components.