Fiscal policy and growth: evidence from OECD countries

Is the evidence consistent with the predictions of endogenous growth models that the structure of taxation and public expenditure can affect the steady-state growth rate? Much previous research needs to be re-evaluated because it ignores the biases associated with incomplete specification of the government budget constraint. We show these biases to be substantial and, correcting for them, find strong support for the Barro model (1990, Government spending in a simple model of endogenous growth. Journal of Political Economy 98 (1), s103-117, for a panel of 22 OECD countries, 1970-95. Specifically we find that (1) distortionary taxation reduces growth, whilst non-distortionary taxation does not; and (2) productive government expenditure enhances growth, whilst non-productive expenditure does not. (C) 1999 Elsevier Science S.A. All rights reserved.