Fiscal Policy and Economic Growth in EU countries: Evidence from Panel Data with Budget Constraints

The aim of this paper is to find evidence whether fiscal policy can affect the economic growth based on the empirical research method. Focus is set on 25 selected member countries of the European Union. Annual government finance data from years 1995 to 2012 are used for an empirical study. Observed indicators are composition and volume of total government expenditures and through budget constrain also tax burden of individual taxes. These indicators are used within endogenous growth model together with capital stock and approximation of human capital. A panel regression with fixed effects is used as an analytic tool. Results show which composition of government expenditures is growth-friendly. Every policy maker must also take into consideration a trade-off between an increase of public expenditures and raising taxes to achieve a balanced government budget. For that reason impacts of various taxes on the economic growth were examined to find out which tax is strongly distortionary. Distrotionary taxes and unproductive govenment expenditues have a negative impact on growth, which is consistent with results in other research articles.