Public provision of healthcare and basic research: What are the joint effects on economic growth and welfare?

We propose a generalized R&D-based economic growth model that incorporates endogenous human capital accumulation in terms of education and health and the public provision of healthcare and basic science. The government taxes households to pay for healthcare personnel and basic researchers. These employees are not anymore available for applied research and for final goods production. Thus, important tradeoffs emerge for economic growth and welfare with respect to government spending policies. While increasing public spending on health and basic research may decrease economic growth and welfare in the short run, we show that they foster economic growth in the medium run and tend to raise long-run welfare when compared to actual levels of spending in Organisation for Economic Co-operation and Development (OECD) countries. In addition, since public funding for healthcare tends to be rather high in most rich countries, the overall public spending shortfall is lower than previous research has shown. Our results highlight the importance of understanding the tradeoffs involved when deciding adequate public funding for healthcare and basic research.