This paper investigates the effect of fiscal spending on the environment quality at the aggregate and disaggregate level for a sample of 128 countries during 2005-2019. We employ Dynamic Panel Threshold regression to examine whether the effect of fiscal expenditure on carbon dioxide emissions is monotonic with the level of economic development or whether there is an economic development threshold over which the effect shows up or ceases to exist. The results suggest that lowering total fiscal spending in all countries leads to increased carbon dioxide emissions, but the effect is greater for low-income countries with a per capita GDP of less than 981$. Additionally, lowering spending on manufacturing & allied activities and on the transportation, could improve the environmental quality but only for relatively developed countries. Healthcare expenditure can deteriorate the environment quality only in low-income and middle-income countries with per capita GDP below 2295$ due to constrained budgets and education expenditure is found to increase emissions only modestly. The empirical findings are robust to alternative model specifications and have significant implications for countries looking forward to resource allocation revisions as part of green budget tagging of their fiscal expenditure.
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