Public spending has effects on growth and distribution which are complex to trace and difficult to quantify. But the composition of public expenditure has become the key instrument by which development agencies seek to promote economic development. In recent years, the development assistance to heavily indebted poor countries (HIPCs) has been made conditional on increased expenditure on categories that are thought to be “pro-poor”. The recent decision by the G-8 to expand debt relief and to increase aid volumes is likely to increase the pressures to allocate resources to particular sectors and functions with a view to promoting growth or reducing poverty. This paper investigates the conceptual foundations and the empirical basis for the belief that poverty can be reduced through targeted public spending [...]