Fiscal deficits and the productivity of public capital

Adopting the endogenous growth modelling strategy of Barro, the relation between the output elasticity of government investment and a variety of variables suggested by the theoretical literature is analyzed for a large sample of countries. We show that several of our variables influence the productivity of public services through various channels, but not in a robust way; the only exception is fiscal deficits. In particular, even though government services are shown to be essential for the growth process through the provision of infrastructure, self-sustaining growth can be undermined by excessive deficit financing that adversely affects the productivity of public capital.