Fiscal spending and economic performance : some stylized facts

This paper complements the cross-country approach by examining the correlates of growth acceleration in per capita gross domestic product around"significant"public expenditure episodes by reorganizing the data around turning points, or events. The authors define a growth event as an increase in average per capita growth of at least 2 percentage points sustained for 5 years. A fiscal event is an increase in the annual growth rate of primary fiscal expenditure of approximately 1 percentage point sustained for 5 years and not accompanied by an aggravation of the fiscal deficit beyond 2 percent of gross domestic product. These definitions of events are applied to a database of 140 countries (118 developing countries) for 1972-2005. After controlling for the growth-inducing effects of positive terms-of-trade shocks and of trade liberalization reform, probit estimates indicate that a growth event is more likely to occur in a developing country when surrounded by a fiscal event. Moreover, the probability of occurrence of a growth event in the years following a fiscal event is greater the lower is the associated fiscal deficit, confirming that success of a growth-oriented fiscal expenditure reform hinges on a stabilized macroeconomic environment (through a limited primary fiscal deficit).