How Harmful Is a High Share of Public Expenditure in GDP?

We aim to analyze the potential positive or negative effects of public expenditure on economic growth, as well as their determinants. To this goal, we use a simple theoretical model, which has the specificity to distinguish between public investment and consumption expenditure, and which could be applied to a wide range of developed or developing countries. Regarding public spending, we find that public consumption expenditure usually harms global economic growth, whereas public investment expenditure benefits economic activity: it can increase income per head, provided real returns on capital are not too small. We can also theoretically underline the existence of an inverted U-shaped relation between the variation of public investment or consumption expenditure and economic growth. An increase in public spending would benefit economic growth only up to a maximal variation, which positively depends on real capital returns, but negatively depends on the capitalization of the economy. Regarding fiscal resources, we find that increasing the consumption taxation rate and the share of fiscal resources collected through consumption taxes could benefit global economic growth, even if it is detrimental to private consumption.