This paper analyzes the impact of several types of government`s policies on the process of production branch growth, reviews the effects of government policy on economic development. Paper describes the role of government policy on economic growth, specifically on production branch. Paper begins with the empirical relationship between economic development and government policy. Due to recent Latvian budget reduction, the aim of paper as novelty is to establish dynamic relationship between government expenditures and GDP. In the absence of any ‘active’ policy intervention, the public budget moves automatically with the economic cycle. Nowadays currently developing countries have high tax rates and government shares relative to their state of development. The analysis also shows that high tax rates and government consumption at early stages of development can slow the structural transformation and economic growth. During the structural transformation, an economy shifts from traditional to modern production methods. Paper propose that this causes the marginal cost of taxation to fall and tax rates to rise. Rising tax revenues, allow the government to increase the level of public investment over time. Increasing levels of investment help to offset the diminishing returns associated with public capital accumulation.