Welfare Retrenchment,Government Expenditure Structure,and Economic Growth: A Perspective of Marx’s Capital Circulation Theory

Abstract

This article considers the impact of government expenditure structure on economic growth. We discuss whether welfare retrenchments in European countries are conducive to overcoming debt crises. By introducing the government sector into the circuit of capital model, we consider the ways that different types of government spending act on the accumulation and realization of the total social capital. Our empirical analysis finds that higher welfare spending is favorable to long-run growth, and the more spending there is on public debts the more the growth regime becomes wage led. Therefore, austerity policies that focus on welfare cuts may aggravate the problem of underconsumption and secular stagnation.

JEL Classification: E11, H53, O11