We show that an expansion in the government size could be desirable from the viewpoint of the economy's long‐run growth, wherein factor intensity between the sectors, the mode of public spending financing, and the form of the cash‐in‐advance (CIA) constraint are crucial. We also show that when real balances are required only for consumption purchases, money financing is equivalent to consumption tax financing, but is not equivalent to income tax financing. If both consumption and gross investment are liquidity‐constrained, then the three financing methods are mutually not equivalent. The optimal financing scheme has the following features: (1) when the CIA constraint applies only to consumption purchases, any combination of the money growth rate and the consumption tax rate that satisfies the government budget constraint constitutes an optimal financing mix; (2) when the CIA constraint applies to both consumption and investment purchases, consumption tax financing only is optimal.