The Ethiopian government aims to increase the overall expenditure especially on service sector by more than double from time to time even if the theorical foundation of some scholars-are inconclusive. I.e. according to Keynesian view, the increase in public spending on socioeconomic and physical structures is important and encourages economic growth while classical economists argue that the increase in public expenditure may shift resources from the productive private sector to public sector which they believe unproductive and hence, crowd out overall performance of the economy. This implies policy makers are under debate whether to increase in public spending helps or hinders economic growth. This paper attempts to measuresrnthe impact of public spending on service sector on economic output in Ethiopia; by using annual data set on GDP and government expenditure for the period of 1974-2012. The elasticity of GDP with respect to public spending on service sector is estimated using VAR regression. The study employ co-integration and error-correction model to examine the short and long run relationships between GDP and government sectors spending on service sector (education, health, defense, transport and communication, tourism, culture and sport). It is found that health, education, defense, tourism, culture and sport have both short and long run statistically positive significant effect on growth while transport and communication have negative insignificant effect on economic growth. These results have policy implication because if health, education and tourism are given the priority by investing more on these sectors they will bring us about sustainable economic growth.