Fiscal Structures and Economic Growth: International Evidence

A large and growing literature searches for the determinants of economic growth, using cross-country regressions. Within this literature, one branch considers the effect of various fiscal policy variables on the growth process. Our paper continues this research effort by systematically examining the effects, if any, of fiscal structure on economic growth. We impose the government budget constraint on the regression equations so that the precise change in fiscal policy can be identified (e.g., the effect of a corporate income tax financed increase in health expenditure). In addition, our analysis employs a pooled cross-section, time-series sample that allows us to use the fixed- and random-effect model methodology. We find that debt-financed increases in government expenditure retard economic growth while tax-financed increases lead to higher or lower growth depending on the expenditure category.