# Do government outlays crowd-out private consumption? Evidence from the European Union

## TL;DR

This study finds that public spending in the EU generally supports private consumption, aligning with Keynesian economic theory.

## Contribution

The study provides new empirical evidence on the crowding-out effect of public expenditure on private consumption in the EU.

## Key findings

- Public expenditure has a positive long-term effect on private consumption in the EU.
- Except for defense spending, public expenditures complement private consumption.
- Disposable income positively influences private consumption, supporting the Absolute Income Hypothesis.

## Abstract

The relationship between private consumption expenditure and public expenditure represents a recurring theme in macroeconomics, with relevance to both empirical and theoretical discourse. However, there is a lack of consensus on its direction. Accordingly, this study aims to examine whether public expenditure rules out private consumption expenditure for European Union during the period of 1995–2022. The findings indicate that public expenditure has a positive effect on private consumption expenditure over the long term, thereby corroborating Keynesian theory. However, except the defense expenditure, the findings demonstrate the complementary effect of public expenditures on private consumption expenditures. Moreover, disposable income has a positive influence in all model specifications, which corroborates the Keynesian Absolute Income Hypothesis. Considering the findings, this study also suggests some policy recommendations for the future.