IDEAS home Printed from https://ideas.repec.org/p/nzt/nztwps/03-14.html
   My bibliography  Save this paper

Fiscal Policy, Growth and Convergence in Europe

Author

Listed:

Abstract

Recent evidence on the impact of fiscal policy – taxes, public expenditures and budget deficits – on long-run growth in OECD countries has adopted the Barro (1990) framework to distinguish between ‘productive’ and ‘unproductive’ expenditures, and ‘distortionary’ and ‘non-distortionary’ taxes. Using estimated long-run growth effects from these fiscal variables, this paper simulates the effects on growth rates of observed fiscal policy changes in the EU. With two exceptions, the individual country growth effects of actual changes in taxes, expenditures and deficits appear plausible at around –0.3 to +0.3 of a percentage point per annum. Few common policy scenarios are apparent in the data however, with key sources of differences between countries being the extent to which distortionary taxes or deficits were used to fund public spending increases and whether additional spending was focussed on ‘productive’ activities. One implication of our results is that the change in the overall share of taxes or spending in GDP or the annual budget surplus/deficit is not a good guide to whether the growth effects of fiscal policy are likely to be positive or negative. The paper also considers whether our growth regression model, which imposes parameter homogeneity across countries, is justified. The evidence suggests this is the case, with a high degree of uniformity across countries. Finally the paper considers whether there is any evidence of ‘fiscal convergence’ across the EU. That is, are growth-affecting fiscal variables becoming more similar over time across the EU? Though data are limited, the answer to this question appears to be negative, with little evidence of unconditional convergence. Countries’ tax or expenditure/GDP ratios do, however, generally revert towards their steady-state paths.

Suggested Citation

  • Norman Gemmell & Richard Kneller, 2003. "Fiscal Policy, Growth and Convergence in Europe," Treasury Working Paper Series 03/14, New Zealand Treasury.
  • Handle: RePEc:nzt:nztwps:03/14
    as

    Download full text from publisher

    File URL: http://www.treasury.govt.nz/publications/research-policy/wp/2003/03-14/twp03-14.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Stokey, Nancy L & Rebelo, Sergio, 1995. "Growth Effects of Flat-Rate Taxes," Journal of Political Economy, University of Chicago Press, vol. 103(3), pages 519-550, June.
    2. Jonathan S. Skinner, 1987. "Taxation and Output Growth: Evidence from African Countries," NBER Working Papers 2335, National Bureau of Economic Research, Inc.
    3. Robert J. Barro, 1991. "A Cross-Country Study of Growth, Saving, and Government," NBER Chapters,in: National Saving and Economic Performance, pages 271-304 National Bureau of Economic Research, Inc.
    4. Richard Kneller, 2000. "The Implications of the Comprehensive Spending Review for the Long-Run Growth Rate: a View From the Literature," National Institute Economic Review, National Institute of Economic and Social Research, vol. 171(1), pages 94-105, January.
    5. Andrea Bassanini & Stefano Scarpetta, 2001. "Does Human Capital Matter for Growth in OECD Countries?: Evidence from Pooled Mean-Group Estimates," OECD Economics Department Working Papers 282, OECD Publishing.
    6. Agell, Jonas & Lindh, Thomas & Ohlsson, Henry, 1997. "Growth and the public sector: A critical review essay," European Journal of Political Economy, Elsevier, vol. 13(1), pages 33-52, February.
    7. Eric M. Engen & Jonathan Skinner, 1992. "Fiscal Policy and Economic Growth," NBER Working Papers 4223, National Bureau of Economic Research, Inc.
    8. Roberto Perotti, 1993. "Political Equilibrium, Income Distribution, and Growth," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 755-776.
    9. Charles I. Jones, 1995. "Time Series Tests of Endogenous Growth Models," The Quarterly Journal of Economics, Oxford University Press, vol. 110(2), pages 495-525.
    10. Aschauer, David Alan, 1989. "Is public expenditure productive?," Journal of Monetary Economics, Elsevier, vol. 23(2), pages 177-200, March.
    11. Martin Carree & Luuk Klomp, 1997. "Testing The Convergence Hypothesis: A Comment," The Review of Economics and Statistics, MIT Press, vol. 79(4), pages 683-686, November.
    12. Jakob Haan & Jan Sturm & Bernd Sikken, 1996. "Government capital formation: Explaining the decline," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 132(1), pages 55-74, March.
    13. Hans-Werner Sinn, 1996. "Social insurance, incentives and risk taking," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 3(3), pages 259-280, July.
    14. Hansson, Par & Henrekson, Magnus, 1994. "A New Framework for Testing the Effect of Government Spending on Growth and Productivity," Public Choice, Springer, vol. 81(3-4), pages 381-401, December.
    15. Pesaran, M. Hashem & Smith, Ron, 1995. "Estimating long-run relationships from dynamic heterogeneous panels," Journal of Econometrics, Elsevier, vol. 68(1), pages 79-113, July.
    16. Alberto Alesina & Dani Rodrik, 1994. "Distributive Politics and Economic Growth," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 465-490.
    17. Barro, Robert J, 1990. "Government Spending in a Simple Model of Endogenous Growth," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 103-126, October.
    18. Ismael Sanz & Francisco J. Vel·zquez, 2004. "The Evolution and Convergence of the Government Expenditure Composition in the OECD Countries," Public Choice, Springer, vol. 119(1_2), pages 61-72, April.
    19. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    20. Robert J. Barro, 1991. "Economic Growth in a Cross Section of Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 106(2), pages 407-443.
    21. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
    22. Glomm, Gerhard & Ravikumar, B., 1994. "Public investment in infrastructure in a simple growth model," Journal of Economic Dynamics and Control, Elsevier, vol. 18(6), pages 1173-1187, November.
    23. Milesi-Ferretti, Gian Maria & Roubini, Nouriel, 1998. "On the taxation of human and physical capital in models of endogenous growth," Journal of Public Economics, Elsevier, vol. 70(2), pages 237-254, November.
    24. King, Robert G & Rebelo, Sergio, 1990. "Public Policy and Economic Growth: Developing Neoclassical Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 126-150, October.
    25. Miller, Stephen M & Russek, Frank S, 1997. "Fiscal Structures and Economic Growth: International Evidence," Economic Inquiry, Western Economic Association International, vol. 35(3), pages 603-613, July.
    26. Robert J. Barro & Xavier Sala-I-Martin, 1992. "Public Finance in Models of Economic Growth," Review of Economic Studies, Oxford University Press, vol. 59(4), pages 645-661.
    27. de la Fuente, Angel, 1997. "The empirics of growth and convergence: A selective review," Journal of Economic Dynamics and Control, Elsevier, vol. 21(1), pages 23-73, January.
    28. Romer,Paul M, 1989. "What determines the rate of growth and technological change?," Policy Research Working Paper Series 279, The World Bank.
    29. Einarsson, T. & Marquis, M.H., 1997. "Fiscal Policy Analysis under Alternative Mechanisms of Endogenous Growth," Working Papers 1997_01_01, Department of Economics, Florida State University.
    30. Baxter, Marianne & King, Robert G, 1993. "Fiscal Policy in General Equilibrium," American Economic Review, American Economic Association, vol. 83(3), pages 315-334, June.
    31. Agell, Jonas & Lindh, Thomas & Ohlsson, Henry, 1999. "Growth and the public sector: A reply," European Journal of Political Economy, Elsevier, vol. 15(2), pages 359-366, June.
    32. Hsiao, C. & Pesaran, M. H. & Tahmiscioglu, A. K., 1998. "Bayes Estimation of Short-run Coefficients in Dynamic Panel Data Models," Cambridge Working Papers in Economics 9804, Faculty of Economics, University of Cambridge.
    33. Bajo-Rubio, Oscar, 2000. "A further generalization of the Solow growth model: the role of the public sector," Economics Letters, Elsevier, vol. 68(1), pages 79-84, July.
    34. Koester, Reinhard B & Kormendi, Roger C, 1989. "Taxation, Aggregate Activity and Economic Growth: Cross-Country Evidence on Some Supply-Side Hypotheses," Economic Inquiry, Western Economic Association International, vol. 27(3), pages 367-386, July.
    35. Ismael Sanz & Francisco J. Velazquez, 2001. "The evolution and convergence of the government expenditure composition in the OECD countries: an analysis of the functional distribution," European Economy Group Working Papers 9, European Economy Group.
    36. Persson, Torsten & Tabellini, Guido, 1994. "Is Inequality Harmful for Growth?," American Economic Review, American Economic Association, vol. 84(3), pages 600-621, June.
    37. Mendoza, Enrique G. & Milesi-Ferretti, Gian Maria & Asea, Patrick, 1997. "On the ineffectiveness of tax policy in altering long-run growth: Harberger's superneutrality conjecture," Journal of Public Economics, Elsevier, vol. 66(1), pages 99-126, October.
    38. Michael Bleaney & Norman Gemmell & Richard Kneller, 2001. "Testing the endogenous growth model: public expenditure, taxation, and growth over the long run," Canadian Journal of Economics, Canadian Economics Association, vol. 34(1), pages 36-57, February.
    39. Joel Slemrod, 1995. "What Do Cross-Country Studies Teach about Government Involvement, Prosperity, and Economic Growth?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 26(2), pages 373-431.
    40. Younger, Stephen D, et al, 1999. "Tax Incidence in Madagascar: An Analysis Using Household Data," World Bank Economic Review, World Bank Group, vol. 13(2), pages 303-331, May.
    41. repec:hhs:iuiwop:492 is not listed on IDEAS
    42. Paul Cashin, 1995. "Government Spending, Taxes, and Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 42(2), pages 237-269, June.
    43. Romer, Paul M., 1990. "Human capital and growth: Theory and evidence," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 32(1), pages 251-286, January.
    44. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
    45. Nader Nazmi & Miguel D. Ramirez, 1997. "Public And Private Investment And Economic Growth In Mexico," Contemporary Economic Policy, Western Economic Association International, vol. 15(1), pages 65-75, January.
    46. Sala-I-Martin, X., 1992. "Public Welfare and Growth," Papers 666, Yale - Economic Growth Center.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. repec:ebl:ecbull:v:8:y:2007:i:4:p:1-7 is not listed on IDEAS
    2. Marta Simões, 2004. "The Education-growth Nexus Across OECD Countries: Schooling Levels and Parameter Heterogeneity," DEGIT Conference Papers c009_029, DEGIT, Dynamics, Economic Growth, and International Trade.
    3. Sourafel Girma, 2005. "Absorptive Capacity and Productivity Spillovers from FDI: A Threshold Regression Analysis," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 67(3), pages 281-306, June.
    4. Felicity C Barker & Robert A Buckle & Robert W St Clair, 2008. "Roles of Fiscal Policy in New Zealand," Treasury Working Paper Series 08/02, New Zealand Treasury.
    5. Greenaway, David & Foster, Neil, 2002. "North-South Trade, Knowledge Spillovers and Growth," Journal of Economic Integration, Center for Economic Integration, Sejong University, vol. 17, pages 650-670.
    6. Jaime Turrion & Carmela Martin, 2003. "Eastern Enlargement of the European Union and Foreign Direct Investment Adjustments," European Economy Group Working Papers 24, European Economy Group.

    More about this item

    Keywords

    Fiscal policy; growth; convergence; taxation; public expenditure;

    JEL classification:

    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H30 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - General

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nzt:nztwps:03/14. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Web and Publishing Team, The Treasury). General contact details of provider: http://edirc.repec.org/data/tregvnz.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.