Fiscal Policy and Economic Growth

Eric M. Engen and Jonathan Skinner

No 4223, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: One view of government fiscal policy is that it stifles dynamic economic growth through the distortionary effects of taxation and inefficient government spending. Another view is that government plays a central role in economic development by providing public goods and infrastructure. This paper develops a generalized model of fiscal policy and output growth that allows for (i) a positive or negative effect of government spending on private productivity, (ii) increasing or decreasing returns to scale, (iii) a transition path away from the equilibrium growth path, and (iv) intratemporal tax distortions. Using data from 107countries during the period 1970-85,and correcting for the potentially serious problem of endogeneity in government policy, we find that a balanced-budget increase in government spending and taxation is predicted to reduce output growth rates.

Date: 1992-12
Note: EFG
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Published as Taxation and Economic Growth, NTJ, Vol. 50, no. 4 (December 1997): 617- 642.

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