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Fiscal Policy and Growth in the OECD

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  • de la Fuente, Angel

Abstract

This paper investigates the impact of public expenditures and taxation on economic growth using panel data for a sample of OECD countries. The empirical results suggest that fiscal policy influences growth through three main channels. First, the government contributes directly to factor accumulation through public investment in infrastructure and other assets. Second, public expenditure tends to crowd out private investment by reducing disposable income and the incentive to save. Third, there is evidence of a sizeable negative ‘externality’ effect of government on the level of productivity. According to the estimates, the effective cost of $1 of public expenditure is around $1.3 once the relevant distortions are taken into account. While this figure is viewed as an upper bound, it does suggest that taxes and public expenditures generate significant efficiency costs which should be taken into account when making budget decisions.

Suggested Citation

  • de la Fuente, Angel, 1997. "Fiscal Policy and Growth in the OECD," CEPR Discussion Papers 1755, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1755
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    More about this item

    Keywords

    Fiscal Policy; Growth; Public Investment;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General

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