Voting not to grow: the effects of polarisation on public investment and growth[Estimating the economic growth impacts of the tax reform for equality and social justice: analysis through a deterministic dynamic general equilibrium model for Colombia]

This paper presents a political economy model of fiscal policy to study the effects of political polarisation on growth. Polarisation affects growth through the fiscal policy channel due to its effect on the composition of the government’s expenditure. There are two kinds of public expenditure goods: productivity-enhancing public investment and welfare-improving district-specific goods. The first kind generates productivity growth, whereas the second kind generates present utility but does not improve productivity levels. Polarisation increases the demand for unproductive public goods at the expense of public investment because agents do not internalise the economic benefits that growth has on districts other than their own. Higher levels of polarisation thus reduce public investment, which leads to lower growth. Therefore, the process of legislative bargaining on the composition of the budget leads to an over-provision of public goods, low public investment, and lower growth when polarisation is higher.