Economy
The effect of the size and mix of public spending on growth and inequality
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The size and mix of public spending can have a considerable effect on growth and inequality. For instance, too large governments tend to reduce growth, unless governments function in a highly effective way. On the other hand, large governments tend to redistribute more, thereby reducing inequality. Also the spending components, such as government investment, family benefits or subsidies matter for growth and inequality. Simulations combining both growth and distributional effects illustrate that most reforms can deliver considerable growth gains and benefit the poor. Quicklinks to working papers:
Blogpost: Most countries have room to increase public investment
This research is closely linked to Using the fiscal levers to escape the low-growth trap |
Background papers
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The effect of the size and mix of public spending on growth and inequality by Jean-Marc Fournier and Asa Johansson
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The positive effect of public investment on potential growth by Jean-Marc Fournier This paper provides evidence that the effect of public investment on growth is sizeable, in line with economic theory and the empirical evidence. There is also evidence that in most countries the public capital stock is below its optimal level. This paper also illustrates that the effect of public investment depends on circumstances. It is the highest in fields that are associated with large externalities, such as research and development or health. And it is the lowest in countries where the public capital stock is already high such as Japan.
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Trends in public finance: Insights from a new dataset
by Debbie Bloch, Jean-Marc Fournier, Duarte Gonçalves and Álvaro Pina
As governments endeavour to promote growth and address income inequalities in their societies, they turn increasingly to the analysis of the quality of public finance in order to identify the optimal mix of spending and revenue instruments to achieve their goals. A comprehensive set of public finance data, accompanied by related structural indicators, has been assembled in order to facilitate the study of the quality of public spending and receipts, and to assist policy makers in shaping their fiscal policy to promote growth and improve equity. Examples of the potential of these data to provide policy insights have been offered. Characteristics of both country groupings and individual country public finance profiles have been highlighted, along with a sample of cross-country analyses, both over time and across a variety of policy-specific areas.
Public finance, economic growth and inequality: A survey of the evidence
by Asa Johansson
This paper reviews the key issues concerning the impact of public spending and taxation on long-run growth and inequality and takes stock of existing theoretical and empirical studies. Overall, the evidence highlights that too large governments may undermine growth through the cost of financing public spending. A reallocation of public spending towards infrastructure and education would raise income in the long run, whereas increasing social welfare spending can reduce inequality as such spending increases redistribution and risk sharing. Similarly, the available evidence also supports the hypothesis that some taxes are more distortionary than others, with income taxes found to be more harmful for growth than consumption and property taxes. However, a tax shift from income towards consumption taxes has equity implications, since income taxes are generally more progressive than other taxes.
Further reading:
Using the fiscal levers to escape the low-growth trap
» Economics Department working papers
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