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Government Expenditures and Taxes Influence on the Economic Growth (Empirical Analysis)

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  • Vratislav Izák
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    Abstract

    Starting from endogenous growth models we test the impacts of both taxes (distortionary and non-distortionary) and expenditures (taking into account economic and functional classification of general government expenditure) using the government constraint. We do not neglect the implicit financing assumptions built into the specification of regression utilising both control and fiscal variables. Static and dynamic panel analysis (fixed effects model) of the 25 EU countries covers the period 1995-2008 for the majority of observations. Forward looking moving averages of the growth rate of GDP (2-5 years) are the dependent variable. We find that productive government expenditure supports growth, whilst non-productive expenditure, especially social protection (COFOG) or social payments (Ameco) does not. Distortionary and indirect taxes reduce economic growth.

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    Bibliographic Info

    Article provided by University of Economics, Prague in its journal Politická ekonomie.

    Volume (Year): 2011 (2011)
    Issue (Month): 2 ()
    Pages: 147-163

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    Handle: RePEc:prg:jnlpol:v:2011:y:2011:i:2:id:778:p:147-163

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    Related research

    Keywords: productive expenditure; government budget constraint; fixed effects model; ESA 95; economic growth; COFOG;

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    References

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    1. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    2. Helms, L Jay, 1985. "The Effect of State and Local Taxes on Economic Growth: A Time Series-Cross Section Approach," The Review of Economics and Statistics, MIT Press, vol. 67(4), pages 574-82, November.
    3. António Afonso & Juan Alegre, 2011. "Economic growth and budgetary components: a panel assessment for the EU," Empirical Economics, Springer, vol. 41(3), pages 703-723, December.
    4. Odedokun, Matthew, 2001. "Public Finance and Economic Growth Empirical Evidence from Developing Countries," Working Paper Series UNU-WIDER Research Paper , World Institute for Development Economic Research (UNU-WIDER).
    5. Fölster, Stefan & Henrekson, Magnus, 1998. "Growth Effects of Government Expenditure and Taxation in Rich Countries," Working Paper Series 503, Research Institute of Industrial Economics, revised 20 Jun 2000.
    6. Kneller, Richard & Bleaney, Michael F. & Gemmell, Norman, 1999. "Fiscal policy and growth: evidence from OECD countries," Journal of Public Economics, Elsevier, vol. 74(2), pages 171-190, November.
    7. Tanzi, Vito & Schuknecht, Ludger, 1997. "Reconsidering the Fiscal Role of Government: The International Perspective," American Economic Review, American Economic Association, vol. 87(2), pages 164-68, May.
    8. Alfonso Arpaia & Alessandro Turrini, 2008. "Government expenditure and economic growth in the EU: long-run tendencies and short-term adjustment," European Economy - Economic Papers 300, Directorate General Economic and Monetary Affairs (DG ECFIN), European Commission.
    9. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
    10. Gupta, Sanjeev & Clements, Benedict & Baldacci, Emanuele & Mulas-Granados, Carlos, 2005. "Fiscal policy, expenditure composition, and growth in low-income countries," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 441-463, April.
    11. Philip R. Gerson, 1998. "The Impact of Fiscal Policy Variableson Output Growth," IMF Working Papers 98/1, International Monetary Fund.
    12. Benedict J. Clements & Christopher Faircloth & Marijn Verhoeven, 2007. "Public Expenditure in Latin America," IMF Working Papers 07/21, International Monetary Fund.
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