Fiscal Policy, Public Expenditure Composition, and Growth : Theory and Empirics

This paper responds to the development policy debate involving the World Bank and the IMF on the use of fiscal policy not only for economic stabilization but also to promote economic growth and increase per capita income. A key issue in this debate relates to the effect of the composition of public expenditure on economic growth. Policy makers and some researchers have argued that expenditure on growth-enhancing functions could enhance future revenue and justify the provision of "fiscal space" in the budget. But there are no simple ways to identify the growth-maximizing composition of public expenditure. The current paper lays out a research strategy to explore the effects of fiscal policy, including the composition of public expenditure, on economic growth, using a time series approach. Based on the modeling strategy of Greiner, Semmler and Gong (2005) we develop a general model that features a government that undertakes public expenditure on (a) education and health facilities which enhance human capital, (b) public infrastructure such as roads and bridges necessary for market activity, (c) public administration to support government functions, (d) transfers and public consumption facilities, and (e) debt service. The proposed model is numerically solved, calibrated and the impact of the composition of public expenditure on the long-run per capita income explored for low-, lower-middle- and upper-middle-income countries. Policy implications and practical policy rules are spelled out, the extension to an estimable model indicated, a debt sustainability test proposed, and the out-of-steady-state dynamics studied.

Bibliographic Details

Main Authors:	Semmler, Willi, Greiner, Alfred, Diallo, Bobo, Rezai, Armon, Rajaram, Anand
Language:	English
Published:	World Bank, Washington, DC 2007-11
Subjects:	ANNUAL REVENUE, BANK POLICY, BONDS, BUDGET CONSTRAINT, BUDGET CONSTRAINTS, BUDGET DEFICIT, BUDGET DEFICITS, BUSINESS CYCLE, CAPITAL ACCUMULATION, CAPITAL ALLOCATION, CAPITAL EXPENDITURE, CAPITAL FORMATION, CAPITAL MARKETS, CAPITAL STOCK, CAPITAL STOCKS, CATEGORIES OF EXPENDITURE, CD, CONSUMPTION EXPENDITURE, CORRECTIVE ACTION, CORRUPTION, CURRENT ACCOUNT, CURRENT ACCOUNT DEFICITS, DEBT, DEBT ISSUE, DEBT LEVEL, DEBT PAYMENTS, DEBT POLICY, DEBT RATIO, DEBT REPAYMENT, DEBT SERVICE, DEBT SERVICES, DEBT SUSTAINABILITY, DEBT TO INCOME RATIO, DEBT-TO-INCOME RATIO, DECISION MAKING, DEPRECIATION, DEVELOPING COUNTRIES, DEVELOPMENT ECONOMICS, DEVELOPMENT POLICIES, DEVELOPMENT POLICY, DEVELOPMENT STRATEGIES, DISCOUNT RATE, ECONOMETRIC TECHNIQUES, ECONOMIC AGENTS, ECONOMIC DEVELOPMENT, ECONOMIC GROWTH, ECONOMIC IMPLICATIONS, ECONOMIC MANAGEMENT, ECONOMIC POLICIES, ECONOMIC POLICY, ECONOMIC STABILIZATION, ECONOMIC SURVEYS, ECONOMIC SYSTEM, EDUCATION EXPENDITURES, EDUCATION SERVICES, EDUCATIONAL SERVICES, ELASTICITY, ELASTICITY PARAMETERS, ENDOGENOUS VARIABLES, ENVIRONMENTAL PROTECTION, EQUATIONS, EXPECTED VALUE, EXPENDITURE, EXPENDITURE CATEGORIES, EXPENDITURE PARAMETERS, EXTERNALITIES, FACILITATION, FEDERAL BUDGET, FINANCIAL SUPPORT, FISCAL ADJUSTMENTS, FISCAL DISCIPLINE, FISCAL EXPENDITURE, FISCAL POLICIES, FISCAL POLICY, FISCAL POLICY RULES, FISCAL RULES, FOREIGN BORROWING, FOREIGN DEBT, GDP, GENERAL PUBLIC, GOVERNMENT BONDS, GOVERNMENT BORROWING, GOVERNMENT BUDGET, GOVERNMENT BUDGET CONSTRAINT, GOVERNMENT DEBT, GOVERNMENT DEFICITS, GOVERNMENT EMPLOYMENT, GOVERNMENT EXPENDITURE, GOVERNMENT EXPENDITURES, GOVERNMENT FINANCE, GOVERNMENT FINANCE STATISTICS, GOVERNMENT REVENUE, GOVERNMENT SPENDING, GROWTH MODEL, GROWTH MODELS, GROWTH RATE, GROWTH THEORIES, GROWTH THEORY, HEALTH SERVICES, HEALTH SPENDING, HOUSEHOLDS, HUMAN CAPITAL, INCOME GROUP, INCOME GROUPS, INCOME LEVEL, INCREASING RETURNS, INDEBTEDNESS, INEFFICIENCY, INFRASTRUCTURE EXPENDITURE, INFRASTRUCTURE INVESTMENT, INSURANCE, INTEREST PAYMENTS, INTEREST RATE, INTEREST RATES, INTERNATIONAL BANK, INVESTMENT EXPENDITURE, INVESTMENT FUNDS, LABOR FORCE, LOAN, LONG RUN DEBT, LOW-INCOME, LOW-INCOME GROUP, LOW-INCOME GROUPS, LUMP-SUM TAXATION, MACROECONOMIC STABILITY, MACROECONOMIC VARIABLES, MACROECONOMICS, MARGINAL PRODUCT, MIDDLE INCOME COUNTRIES, MILITARY SPENDING, MONETARY FUND, MORAL HAZARD, NEGATIVE VALUES, NET BORROWING, NET CAPITAL, NET DEBT, NUMERICAL VALUE, NUTRITION, OPTIMIZATION, OUTPUT RATIO, PER CAPITA INCOME, PHYSICAL CAPITAL, POLICY DECISIONS, POLICY DESIGN, POLITICAL ECONOMY, POVERTY REDUCTION, PRESENT VALUE, PRIVATE CAPITAL, PRIVATE CONSUMPTION, PRIVATE MARKET, PRIVATE SECTOR, PRODUCTION FUNCTION, PRODUCTIVITY, PROGRAMS, PUBLIC ADMINISTRATION, PUBLIC CAPITAL, PUBLIC CONSUMPTION, PUBLIC DEBT, PUBLIC DEFICITS, PUBLIC EDUCATION, PUBLIC EXPENDITURE, PUBLIC GOODS, PUBLIC INFRASTRUCTURE, PUBLIC INVESTMENT, PUBLIC INVESTMENTS, PUBLIC POLICY, PUBLIC RESOURCES, PUBLIC SECTOR, PUBLIC SERVICES, PUBLIC SPENDING, RATE OF GROWTH, RECESSIONS, REPAYMENTS, RESERVE, RESERVES, RETURN, SANITATION, SOCIAL INSURANCE, SOCIAL INSURANCE SYSTEM, SOCIAL INSURANCE SYSTEMS, SOCIAL SECURITY, STATIC ANALYSES, STATIC ANALYSIS, STOCKS, SUSTAINABLE DEBT LEVEL, SUSTAINABLE FISCAL POLICY, TAX, TAX COLLECTION, TAX RATE, TAX REVENUE, TAXATION, TOTAL FACTOR PRODUCTIVITY, TOTAL PUBLIC EXPENDITURE, TRUST FUND, UNCERTAINTY, UNDERVALUATION, UTILITY FUNCTION, VALUABLE, WAGE, WAGE EXPENDITURE, WATER SUPPLY INFRASTRUCTURE, WELFARE FUNCTION, WITHDRAWAL, WORLD INTEREST RATE, WORTH,
Online Access:	http://documents.worldbank.org/curated/en/2007/11/8736497/fiscal-policy-public-expenditure-composition-growth-theory-empirics https://hdl.handle.net/10986/7641
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