EXPANSIONARY VERSUS CONTRACTIONARY GOVERNMENT SPENDING

This article theoretically examines the impact of different forms of government spending on national income in a financially open economy with a significant net international investment position the central bank of which sets domestic interest rates to target inflation. It shows that whether government spending is expansionary or contractionary ultimately depends on the productivity of that expenditure, a result that has major implications for the efficacy of fiscal policy deployed for either stimulus or austerity reasons. The key prediction of the model is that public consumption and unproductive public investment are procyclical, whereas only productive public investment is countercyclical. (JEL F41)     

Short- and long-term relation between economic development and government spending: the role of quality of institutions

ABSTRACT

This paper tests the Wagner’s assumption of the one-sided directional flow moving from economic growth to public spending considering an international database over the 1996–2012 period. By using indicators on the level of country control of corruption, government effectiveness, political stability, rule of law, regulatory quality and voice and accountability, the paper analyses the economic performance-public spending nexus controlling for the quality of the institutions. The empirical evidence supports the existence of the Wagner’s law, showing that, in the short-run, public spending positively reacts to a positive shock in national income, with a lower magnitude for democratic countries. In the long run, the error-correction model shows the convergence between public spending and national output occurring less quickly for non-democratic, low-income and to a smaller extent for non-OECD countries. Institutional quality, such as effort in controlling corruption and the presence of regulations that permit and promote private sector development, may help reducing the amount of per capita public spending and making it more productive. Higher expenses in compositional amenities such as public services for the elderly may explain why public spending per capita will increase the most in economies with a higher share of the population that need healthcare facilities.     

The dual nature of public goods and congestion: the role of fiscal policy revisited

Abstract The role of fiscal policy is examined when public goods provide both productive and utility services. In the presence of congestion, the consumption tax is shown to be distortionary. Optimal fiscal policy involves using consumption‐based instruments in conjunction with the income tax. An income tax‐financed increase in government spending dominates both lump‐sum and consumption tax‐financing. Replacing the lump‐sum tax with an income tax to finance a given level of spending dominates introducing an equivalent consumption tax. These results contrast sharply with the literature, where the consumption tax is generally viewed as the least distortionary source of public finance.     

SOCIAL STATUS,EDUCATION AND GOVERNMENT SPENDING IN A TWO‐SECTOR MODEL OF ENDOGENOUS GROWTH*

This paper extends the relative wealth specification of status preference to the two‐sector Uzawa (1965 )– Lucas (1988 ) model and examines the effectiveness of government spending on economic growth. It is found that the desire for relative wealth‐induced social status and/or the education component of relative wealth‐induced social status are important ingredients in determining the growth rate effects of government spending. Provided that the agent is concerned with his or her relative social position, the education‐induced social status plays a more important role than the physical‐asset‐induced social status in determining the validity of public spending on growth. If individuals do not care about their education‐driven social rewards, then an increase in government spending has no effect on the balanced growth rate regardless of the presence of the physical‐asset‐induced social status. A rise in government spending reduces the long‐run growth rate if the education‐induced social status is present.     

公共支出结构对收入不均等影响研究——基于公共服务均等化视角分析

收入不均等影响到社会公平与经济发展,而收入公平分配是政府的主要责任,也是政府公共支出的依据之一.影响收入分配不均等的因素有很多,其中由于政府相应责任缺位,公共支出结构偏向,使得公共支出中基本公共服务支出不足是其主要原因.本文实证分析得出公共支出总量与结构严重影响基本公共服务供给,进而影响着收入不均等的水平,成为社会公平和稳定的重要因素.政府应从制度上进行公共支出改革,规范督促地方政府优化公共支出结构,不断提高对民生支出的主动性,逐步缩小基本公共服务的差距,缩小收入不均等的水平.     

On Indeterminacy and Growth under Progressive Taxation and Utility‐Generating Government Spending

We examine the theoretical interrelations between progressive income taxation and macroeconomic (in)stability in an otherwise standard one‐sector AK model of endogenous growth with utility‐generating government purchases of goods and services. In sharp contrast to traditional Keynesian‐type stabilization policies, progressive taxation operates like an automatic destabilizer that generates equilibrium indeterminacy and belief‐driven fluctuations in our endogenously growing macroeconomy. Unlike the no‐sustained‐growth counterpart, this instability result is obtained regardless of (i) the degree of the public‐spending preference externality and (ii) whether private and public consumption expenditures are substitutes, complements or additively separable in the household's utility function.     

RE-EXAMINING THE EFFECTIVENESS OF STABILISATION POLICY

This paper develops an alternative international macroeconomic model for evaluating the effectiveness of fiscal and monetary policy in stabilising national income under fixed and floating exchange rates. It encompasses national output and income, saving, investment, money and capital flows and linkages between the exchange rate, price levels and real interest rates consistent with international parity conditions. It demonstrates that the nature of government spending is pivotal to the effectiveness of fiscal policy, revealing that, ceteris paribus , higher public consumption expenditure contracts national income and depreciates the exchange rate, whereas higher productive public investment spending has opposite effects. The framework also shows that the effectiveness of fiscal and monetary policy as macroeconomic policy instruments is not ultimately dependent on the exchange rate regime.     

Bond financed fiscal policy and the problem of instrument instability

Previous analyses of bond financed government expenditure policies have indicated stability problems but have considered only a once-for-all and sustained increase in government spending. In this paper we examine the bond financing of temporary government expenditure changes, which form part of an ongoing policy designed to “balance the budget over the business cycle.” We find that an endogenous fiscal policy can keep national output near its target value but that the effects on the national debt and the size of the public sector are likely not to be transitory. There is a strong tendency toward instrument instability, in that control of the economy forces the level of government spending to forever diverge from its equilibrium value.     

Health and infrastructure in a model of endogenous growth

This paper studies the optimal allocation of government spending between infrastructure and health (which affects labor productivity as well as household utility) in an endogenous growth framework. A key feature of the model is that infrastructure affects not only the production of goods but also the supply of health services. The rate of time preference is also endogenously related to health outcomes. The first part considers the case where health enters as a flow in production and utility, whereas the second focuses on a “stock” approach. Growth- and welfare-maximizing rules for income taxation and the allocation of public spending are derived.     

财政政策、货币政策与国外经济援助

本文通过把国外经济援助分成直接对私人的经济援助和直接对政府的经济援助来讨论这两类经济援助对政府财政政策和货币政策的影响。我们发现对私人的经济援助的增加可以使得私人消费水平和政府公共消费水平增加 ,但是它也导致政府收入税税率和通货膨胀率的提高 ;另一方面 ,对政府的经济援助增加可以使得均衡时的私人资本存量、私人消费水平和政府公共消费水平增加 ,同时可以使得均衡时的收入税税率和通货膨胀率下降。     

THE TWO‐WAY RELATIONSHIP BETWEEN GOVERNMENT SPENDING AND CORRUPTION AND ITS EFFECTS ON ECONOMIC GROWTH

The existing empirical evidence suggests that in low‐income economies, an increase in government spending leads to a reduction of growth. This article aims to explain this empirical fact by considering a growth model that incorporates a two‐way relationship between corruption and government spending. That is, government spending gives rise to corruption and rent seeking, which feeds back by distorting the structure and size of government spending. In addition, the cost of corruption depends on the wage rate. Therefore, in low‐income economies, increases in government spending tend to generate larger social losses caused by a higher level of rent dissipation and a concomitant rise in corruption and government inefficiency. Consequently, in such economies, an increase in government spending is more likely to result in a decline of economic growth. (JEL H3, O11, O41)     

GOVERNMENT CONSUMPTION AND THE COMPOSITION OF PRIVATE EXPENDITURE: A CONDITIONAL ERROR CORRECTION MODEL

In this paper we provide empirical evidence of the relationship between government purchases and private expenditure by adopting a microeconomic approach. Using UK quarterly data, a long‐run demand system conditioned to the public sector is obtained by specifying a vector error correction model in which government consumption is assumed as an exogenous I(1) forcing variable. Our findings reject the hypothesis of separability of individual preferences between public and private expenditures, with simultaneous crowding‐out/in effects. Moreover, crowding‐out effects of government consumption on private spending are found to be larger for those goods and services that produce similar utility.     

THEORY OF THE STATE, GOVERNMENT TAX AND PURCHASING POLICY, AND INCOME DISTRIBUTION

Until recently, there has been virtually no discussion among professional economists of the impact of government expenditures on the distribution of income.¹ Neoclassical economics has traditionally shown little interest in distributional issues. Little is said beyond the assumption that factors are paid their marginal products. Micro economics is said to take a “neutral” stance with regard to distributional issues. Static efficiency of allocation is attainable for any income distribution, and consequently, so the parable goes, no income distribution is superior on purely economic grounds to any other. Macro economics also purports to be neutral with respect to distribution. Government expenditures in Keynes' model appear as an undifferentiated blob called “G”. The only interest macro economics takes in distribution issues is concerned with the marginal effect of redistribution on the marginal propensity to consume out of income. Keynesian economics, therefore, is unable to say whether one form of government expenditure is superior to another so long as both accomplish macro objectives. When orthodox economists have approached the issue of the government's distributional impact, they have until recently focused solely on its use of taxes and transfer payments. Public finance has traditionally ignored the expenditure side of state activity since, after all, government activity was a necessary evil, benefiting no one. Gillespie's path-breaking study in 1965 finally acknowledged the utility of government spending, but his analysis and those that have followed in the orthodox tradition have been hampered by a number of awkward premises. First, the orthodox studies of fiscal incidence implicitly accept the view of the government as a neutral arbiter rather than a protagonist of the dominant classes in society. Second, benefits of government services are assumed to be accurately measured by outlays. Thus, if we find that the government spends four times as much on highways as on police, it is assumed that the utility of highways is four times that of police even though one cannot even imagine the continuity of the status quo without the police while many responsible citizens argue that we should drastically curtail outlays on roads. Obviously, the utility of the police in terms of system maintenance exceeds that of the more expensive highway expenditures. Third, it is assumed that for each dollar spent by the government, only one person will benefit when, in fact, many disparate groups can benefit from the same expenditure. A dollar spent on education benefits the student as well as hislher employer. Fourth, Gillespie and his orthodox followers ignore any effect of the government on the pre-tax, pre-transfer distribution of income which they take as given. A hypothesis which we examine in this paper is that the government has an enormous influence over the shape of the pre-tax, pre-transfer income distribution. A more general criticism of previous studies of fiscal incidence is that they suffer from a poorly defined theory of the state. This assertion is most clzarly illustrated by the categorization in previous studies of a wide variety of public exp-enditures as “public goods” (such as national military expenditures). The benefits of these “public goods” are allocated among various income groups in several ways, for example on the basis of wealth ownership (both productive and consumptive) or on a per capita basis. The method of allocation chosen has enormous consequences for one's estimate of overall fiscal incidence. According to Herriot and Miller, those with incomes over $50,000 either receive a net benefit of 4.5 percent of their total income from the government or lose 42.1 percent, depending upon the allocation formula chosen for public goods. Previous studies have taken an agnostic position with respect to the appropriateness of the several allocative assumptions. But this is merely simple empiricism without theoreticai foundation, and thus the formulation of specific hypotheses which employ scientific procedures is impossible. What is needed to provide an interpretation of the data is a well-articulated theory of the state-an area to which we turn our attention in the next section of this paper.     

Keynesian Multipliers, Direct Crowding Out, and the Optimal Provision of Public Goods

This paper studies Keynesian multipliers in a macroeconomic model with monopolistic competition. We allow public and private consumption goods to be perfect substitutes in private utility. This enables us to study the effect of direct crowding out on the size of national income, profit and employment multipliers for a given rise in real public spending. A positive real national income multiplier is obtained if consumers value public consumption less than private consumption. In addition, we determine the effective marginal cost of public funds and the optimal provision of public goods, both in the short run and in the long run.     

NATIONAL PRODUCT AT CONSTANT PRICES IN THE FEDERAL REPUBLIC OF GERMANY

With few exceptions, only cormmodity flows and values which can be determined by means of commodity flows (flows of goods and services) are calculated in constant prices in the official national accounts of the Federal Republic of Germany. Figures an the industrial origin and the final use of the national product are published, the former according to thirty industries, the latter according to the major types of uses of which in particular private consumption expenditure has been further analysed. The computations at constant prices are based on market prices and not on factor costs. It is only on this basis that a uniform valuation of the production and the expenditure side can be made since the turnover tax, which is the most important indirect tax, is contained in the elements of final demand in varying shares and cannot be eliminated (the tax is part of the price and has cumulative effect). The computation at constant prices presupposes a breakdown of the values in current prices according to quantities and prices. This raises a number of problems, e.g. because seller and buyer may consider differing aspects-production costs, technical attributes, etc., on the one hand, and use etc., on the other hand. In part there exist only vague ideas, or no ideas at all, as to what is to be considered-from a theoretical point of view-as quantity and price. In other cases the two values can only with great difficulties, if at all, be quantified, or there exists no market price and only the production costs are available. The author deals in greater detail with differences in quality and new commodities, the determination and treatment of quantities and prices for services, in particular for trade services (services attached to goods), the computation of government services at constant prices considering the development of productivity in public service, the determination of the values calculated as balances, above all the treatment of changes in the terms of trade for net exports of goods and services, the computation of the contributions of industries to the gross domestic product and, finally, the reconciliation of the production and the expenditure side. In a third section the author deals with index formulae and the base year. In the majority of cases values are deflated; partly, however, they are currently adjusted by means of volume and quantity data. On the production side the two methods are in part combined. In a concluding section a survey is provided of the computation methods used in the Federal Republic of Germany and on the available material for the computations. Mention is made of depreciation at constant prices.     

Industrialization and Government Expenditures: The Case of South Korea

South Korea has been transformed from a nation of war torn poverty to an industrial giant in one generation. Many attribute this to the role of government and believe that the size of government spending increases with industrialization. This paper, using time series data for the 1970–1990 period, empirically tested the impact of industrialization on government spending in Korea. Our results suggest that the two major determinants of public spending are private sector's income (output) and the overall state of employment. Further, our results show that the income elasticity of demand for public goods is greater than unity, both in the short-run and long-run. [H1]     

The Role of State Fiscal Policy in State Economic Growth

Do state policy makers have the ability to affect a state's rate of economic growth? This article examines one possible source of growth and per capita output level disparities by studying the role that state taxation and public expenditure decisions play in fostering economic development. Using pooled annual U.S. state‐level data from 1972 to 1998, a fixed‐effects model is employed to examine the effects of changing tax rates on both state per capita output levels and growth rates. The results indicate that higher tax rates negatively influence short‐run state economic growth, which lowers state output levels. However, long‐run growth is unaffected by changes in state tax rates, even after adjusting for the effects of initial per capita output levels, state expenditures, and aid from the federal government. Nor do changes in state public spending rates and federal aid permanently alter state growth rates, implying that state fiscal policies have only transitory effects on state growth. (JEL H71, O40, R11)     

Public finance,government spending and economic growth: the case of local governments in Brazil

The impact of local government spending on output growth is estimated using a panel of Brazilian municipalities during 1985–1994. Attention is focused on three expenditure categories, housing/urbanization, health/sanitation, and transport services, which are expected to be growth-enhancing, and their sources of finance (local taxes, intergovernmental transfers, and borrowing). The determinants of these spending categories are also examined. The size of the municipality, measured by the resident population, is shown to affect government spending nonlinearly. This is a contribution to the recent empirical literature on the linkages between decentralized government spending, public finances, and economic growth at the local, rather than national, level.     

IMPROVING THE ANALYTICAL AND DATA FRAMEWORK OF THE GOVERNMENT SECTOR FOR NATIONAL GOALS ACCOUNTING*

Provision of “market goods” follows the decision rules of traditional microeconomics; pricing and resource allocation for such goods tend towards Pareto optimality. The provision of “collective goods,” by contrast, depends on political (or quasi-political) collective decision processes; beneficiaries often receive a share of collective goods free of charge or well below average or marginal (private or social) costs. No inherent tendency towards optimality may be presumed and separate analysis of collective goods becomes an essential part of national goals accounting. The national-income-accounts (NIA) distinction between personal consumption expenditures (PCE) and government purchases of goods and services corresponds roughly to a division between market goods bought by the consumer and a major category of “collective goods” (i.e. “public goods” provided by government). However, a significant proportion of PCE represents “collective goods” paid for by government, business, or nonprofit organizations and provided on behalf of the consumer, whereas a part of NIA government purchases represents services paid for by the consumer (i.e. “market goods”). This article develops operationally meaningful distinctions among “market goods,”“collective goods,” and “tied aid” (a mixed category with market-good and collective-good characteristics). These distinctions are determined by the nature of the decision processes–rather than by the characteristics of the beneficiary or the supplier. This classification is related to the national income accounts and major discrepancies are pinpointed. The blurring of the distinction among market goods, collective goods and tied aid is found to be most consequential in the NIA treatment of “education” and “medical care” services. NIA data for these two services are restructured for national goals accounting purposes in order to illustrate both the quantitative importance and the empirical feasibility of classifying benefits by their respective decision processes.     

Tax and spend or spend and tax? An empirical investigation for Austria

The aim of this contribution is to discriminate between the rivallingspend and tax andtax and spend hypotheses in order to check empirically the relationship between government spending and taxation decisions in Austria. For that purpose, the authors estimate a tri-variate structural VAR Model of Austria's public sector that, besides expenditures and revenues, includes aggregate income as an additional variable. They implement impulse-response functions and frequency domain techniques in order to identify the causal relation between government outlays and receipts. The budget making process is interpreted as an error correction model which allows to estimate to what extent revenues and expenditures are adjusted whenever the government sees its long run budget constraint violate. The empirical findings strongly support the spend and tax view that budget decision-making is significantly dominated by the expenditure side in Austria.We are gratefully indebted to Peter Weiss and three anonymous referees for many valuable comments and suggestion.