Self-financing of Government Aid Programs

We provide a systematic discussion of possible economic and fiscal effects of public funding. Through a comprehensive analysis of potential micro- and macroeconomic transmission channels of public funding programs, we develop a checklist to evaluate the consistency of recent studies. In addition to the intended stimulus, theoretical research has identified additional effects which potentially diminish the positive effects of funding on output and employment. These are crowding-out, substitution and financing effects, which might have a negative effect on the overall economic activity. Although these additional effects are well established in the theoretical literature and are increasingly considered in micro economic evaluations, they are often neglected in empirical macroeconomic studies. This tends to result in an overestimation of the fiscal returns of public funding. From the theoretical and empirical discussions we formulate a checklist, which helps to evaluate the results of current studies. This checklist is structured in three sections. First, all explicit and implicit assumptions of the studies are identified. These assumptions clearly define the author’s view of the actual economic processes. Second, all economic effects which arise in this clearly defined analytical framework should be quantified in a given study. Any additional effects, which are not defined within the framework, can therefore not be regarded. Finally, based on the predicted economic effects the fiscal returns and the degree of self-financing are computed.