Uncertainty or Level of Government Expenditure - What Is More Harmful for Economy?

In these days, many developed countries are experiencing fiscal changes. It is therefore necessary to examine the various effects of fiscal policy. Current economic literature often examines the influence of fiscal variables on economic growth, but the influence of volatility of these variables is less frequently dealt with. The government expenditure uncertainty may even represent a much more problematic factor than the level of expenditure. The aim of this paper is thus to describe the effect of government expenditure on long-term economic growth with a special emphasis on the impact of volatility of government expenditure. To ensure the comprehensiveness of the model, both government expenditure and tax burden are investigated. The taxation is measured not only using a standard tax quota, but also an alternative World Tax Index. The empirical analysis in this article is based on a dynamic panel model which uses data for OECD countries for 2000-2010. The results confirm the assumptions about the negative impact of volatility of government expenditure on growth in model with tax quota as well as in model with World Tax Index.