The impact of government spending on well-being: a case of upper middle-income countries and high-income countries

The welfare effects of government redistributive policy have been subject to considerable debate for decades. Against this background, this study explores the effect of government social spending on an empirically constructed measure of well-being in a panel of 16 upper middle-income countries and 38 high-income countries observed between 2002 and 2019. The study utilises the Generalised Method of Moments (GMM) Model to estimate the empirical relationship between government social spending and well-being. The results suggest that welfare gains in upper middle-income countries are derived from redistributive spending that prioritises schooling. On the other hand, rich countries are more likely to benefit from health-related spending. Based on the results the study confirms that disaggregated social spending in upper middle-income nations and wealthy nations does not impact aggregate well-being uniformly. Therefore, efforts to improve aggregate welfare through government redistributive spending ought to consider these attendant heterogeneities. This study examines the association between government social spending and well-being using a panel dataset of 54 upper middle-income and high-income countries. The novel feature of this investigation is embedded in the construction of the aggregate well-being index. We employed the Principal Components Analysis (PCA) technique to build a composite well-being index. This well-being indicator incorporates age dependency, access to water, access to sanitation, and life expectancy, the institutional quality is measured by four indicators which are government effectiveness, control of corruption, political stability and rule of law, environment degradation (CO2 emissions) and economic growth (GDP). This approach is expected to contribute substantially to the scarce literature in the field of well-being in upper middle-income countries and higher-income countries. A focus on well-being research is important since improved well-being leads to a better quality of life and stimulates economic performance through its influence on human development. The findings suggest that welfare gains in upper middle-income economies are attributed to social spending that prioritizes education. In contrast, wealthy countries are more likely to benefit from health-related spending. Policymakers should develop redistributive policies that address the specific needs of each region since evidence demonstrates that disaggregated social spending in upper middle-income countries and wealthy nations does not influence aggregate well-being uniformly.