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The Effect of the Size and the Mix of Public Spending on Growth and Inequality

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  • Jean-Marc Fournier
  • Åsa Johansson

Abstract

This paper provides evidence on the effects of the size and the composition of public spending on long-term growth and inequality. An estimated baseline convergence model captures the long-term effect of human capital and total investment on potential output for a panel of OECD countries. The composition of public spending added to this baseline provides evidence that certain public spending items (public investment and education) boost potential growth, while others (pensions and public subsidies) lower potential growth. There is also evidence that too large governments reduce potential growth, unless the functioning of government is highly effective. This paper also investigates the effect of public spending items on income inequality. Increasing the size of government, family benefits or subsidies decreases inequality. Reforms making the government more effective and an education reform that aims at encouraging completion of secondary education may also decrease income inequality. Simulations combining both growth and distributional effects illustrate that most reforms can deliver considerable growth gains and benefit the poor. L’effet de la taille et de la composition des dépenses publiques sur la croissance et les inégalités Cet article fournit des preuves empiriques sur les effets de la taille et de la composition des dépenses publiques sur la croissance à long terme et les inégalités. Un modèle de convergence de base mesure l’effet à long terme du capital humain et de l’investissement total sur la production potentielle pour un panel de pays de l’OCDE. La composition des dépenses publiques ajoutée à ce modèle de base montre que certains postes de dépenses publiques (investissements publics et éducation) stimulent la croissance potentielle, tandis que d’autres (pensions et subventions publiques) diminuent la croissance potentielle. Il est également prouvé que des gouvernements trop importants réduisent la croissance potentielle, à moins que le fonctionnement du gouvernement soit très efficace. Cet article examine également l’effet des dépenses publiques sur les inégalités de revenus. Augmenter la taille du gouvernement, les prestations familiales ou les subventions diminue les inégalités. Les réformes rendant le gouvernement plus efficace et une réforme de l’éducation qui vise à encourager l’achèvement de l’enseignement secondaire peuvent également réduire les inégalités de revenus. Des simulations combinant les effets de croissance et de distribution montrent que la plupart des réformes peuvent générer des gains de croissance considérables et bénéficier aux pauvres.

Suggested Citation

  • Jean-Marc Fournier & Åsa Johansson, 2016. "The Effect of the Size and the Mix of Public Spending on Growth and Inequality," OECD Economics Department Working Papers 1344, OECD Publishing.
  • Handle: RePEc:oec:ecoaaa:1344-en
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    File URL: http://dx.doi.org/10.1787/f99f6b36-en
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    Cited by:

    1. Jean-Marc Fournier, 2016. "The Positive Effect of Public Investment on Potential Growth," OECD Economics Department Working Papers 1347, OECD Publishing.
    2. Oguzhan Akgun & David Bartolini & Boris Cournède, 2017. "The capacity of governments to raise taxes," OECD Economics Department Working Papers 1407, OECD Publishing.
    3. Kose,Ayhan & Ohnsorge,Franziska Lieselotte & Ye,Lei Sandy & Islamaj,Ergys, 2017. "Weakness in investment growth : causes, implications and policy responses," Policy Research Working Paper Series 7990, The World Bank.
    4. Álvaro Pina, 2016. "Making public finances more growth and equity-friendly in the euro area," OECD Economics Department Working Papers 1316, OECD Publishing.
    5. Annabelle Mourougane & Jarmila Botev & Jean-Marc Fournier & Nigel Pain & Elena Rusticelli, 2016. "Can an Increase in Public Investment Sustainably Lift Economic Growth?," OECD Economics Department Working Papers 1351, OECD Publishing.
    6. Oecd, 2017. "Making trade work for all," OECD Trade Policy Papers 202, OECD Publishing.
    7. Orsetta Causa & Mikkel Hermansen, 2018. "Income Redistribution Through Taxes and Transfers across OECD Countries," LIS Working papers 729, LIS Cross-National Data Center in Luxembourg.
    8. repec:nos:voprec:2017-09-1 is not listed on IDEAS
    9. Debra Bloch & Jean-Marc Fournier & Duarte Gonçalves & Álvaro Pina, 2016. "Trends in Public Finance: Insights from a New Detailed Dataset," OECD Economics Department Working Papers 1345, OECD Publishing.
    10. Åsa Johansson, 2016. "Public Finance, Economic Growth and Inequality: A Survey of the Evidence," OECD Economics Department Working Papers 1346, OECD Publishing.
    11. Patrice Ollivaud, 2017. "Improving the allocation and efficiency of public spending in Indonesia," OECD Economics Department Working Papers 1381, OECD Publishing.
    12. Orsetta Causa & Mikkel Hermansen, 2017. "Income redistribution through taxes and transfers across OECD countries," OECD Economics Department Working Papers 1453, OECD Publishing.
    13. Debra Bloch & Jean-Marc Fournier, 2018. "The deterioration of the public spending mix during the global financial crisis: Insights from new indicators," OECD Economics Department Working Papers 1465, OECD Publishing.
    14. Oguzhan Akgun & Boris Cournède & Jean-Marc Fournier, 2017. "The effects of the tax mix on inequality and growth," OECD Economics Department Working Papers 1447, OECD Publishing.
    15. repec:vrn:journl:y:2017:i:3:p:281-290 is not listed on IDEAS
    16. Yosuke Jin & Aida Caldera Sánchez & Pilar Garcia Perea, 2017. "Reforms for more and better quality jobs in Spain," OECD Economics Department Working Papers 1386, OECD Publishing.
    17. repec:sae:niesru:v:244:y:2018:i:1:p:r15-r20 is not listed on IDEAS
    18. repec:eee:rujoec:v:3:y:2017:i:3:p:221-239 is not listed on IDEAS
    19. Orsetta Causa & Mikkel Hermansen & Nicolas Ruiz, 2016. "The Distributional Impact of Structural Reforms," OECD Economics Department Working Papers 1342, OECD Publishing.
    20. World Bank Group, 2017. "Global Economic Prospects, January 2017," World Bank Publications, The World Bank, number 25823, November.
    21. Christophe André & Hyunjeong Hwang, 2018. "Tax reform to support growth and employment in Finland," OECD Economics Department Working Papers 1468, OECD Publishing.
    22. Patrice Ollivaud & Yvan Guillemette & David Turner, 2016. "Links between weak investment and the slowdown in productivity and potential output growth across the OECD," OECD Economics Department Working Papers 1304, OECD Publishing.

    More about this item

    Keywords

    government size; growth; income inequality; public spending;

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs

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