Public spending and growth: a model

The major crises that hit the world economy in the last 15 years have caused a growing presence of the state in the economy. Deep crises almost inevitably give rise to growing public interventions to avoid the collapse of the economic and social system. However, the demand for more state interventions does not make it less important to be concerned for the extension and quality of these interventions in order to contain their possible negative effects on the economy as a whole. The paper is an attempt at dealing with these issues by using a simple growth model. Our main result is that growing state interventions, in the form of larger deficits, can produce positive effects on the economy by not simply increasing aggregate demand but, most of all, by contributing to raise the productivity of the economy. An objective that can be realized by mainly devoting public outlays to ‘productive expenditures’, i.e. investment in physical and human capital.