Growth Promotion Policies When Taxes Cannot Be Raised

This paper examines the growth effects of R&D subsidies and public-funded basic research in an R&D-based endogenous growth model under circumstances where the government cannot raise taxes. We show that if individuals have enough life-cycle saving motives and R&D productivity is sufficiently high, g>r holds in equilibrium, and the government can finance the required expenses while perpetually rolling over the debt. Whenever possible, debt-financed R&D subsidies always enhance short-run growth. However, long-term growth is promoted only when the initial g-r gap is wide enough. Even when the long-term effect is negative, the economy may benefit from the increased GDP during a long transition to the new BGP. We confirmed that the social return to R&D is always higher than the growth rate despite g>r. In an extended model, we examine the effect of enhancing public-funded basic research and find that it is particularly effective for low-growth economies.