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Fiscal position and the financing of productive government expenditures: an application to Latin America

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  • Tamoya A.L. Christie
  • Felix K. Rioja

Abstract

Government spending on public infrastructure, education, and health care can increase economic growth. However, the appropriate financing depends on a country’s fiscal position. We develop a two-sector endogenous growth model to explore how variations in the composition and financing of government expenditures affect economic growth. We find that, when tax rates are moderate, funding public investment by raising taxes may increase long-run growth. If existing tax rates are high, public investment is only growth enhancing if funded by restructuring the composition of overall public spending. Additionally, public investment that is debt financed can have adverse effects on long-run growth due to the resulting increases in interest rates and debt-servicing costs.

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  • Tamoya A.L. Christie & Felix K. Rioja, 2017. "Fiscal position and the financing of productive government expenditures: an application to Latin America," Journal of Economic Policy Reform, Taylor and Francis Journals, vol. 20(2), pages 113-135, April.
    • Handle: RePEc:taf:jecprf:v:20:y:2017:i:2:p:113-135
    DOI: 10.1080/17487870.2015.1119045
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