Transcript Fiscal Policy and Growth

Government and Growth
Francesco Daveri
Outline
Some facts
Theory
Empirics
Digging deeper: Kneller, Bleaney and Gemmell
(1999)
Conclusions
Common secular trend towards
Bigger Government
Big Government:
bad for growth?
Not necessarily
Public good provision (rule of law)
enhances factor accumulation …
… and efficiency
.. But taxes discourage market activities
.. and control of corruption is associated
to high per capita GDP
Theory: summing up
Some Govt-related items affect growth:
• Public goods (Productive expenditure)  good
for growth
• Distorting taxation  bad for growth
… while some others are irrelevant for growth:
• Non-distorting taxes (citizen tax)
• Unproductive expenditure (if financed with nondistorting taxes)
MAIN MESSAGE: composition of spending and taxation matters
Empirical case
Is the empirical case as apparent as the theoretical
case ? Not really, unfortunately
• Barro (1991, 1997)
– public consumption (Gov’t spending minus defense
minus education) negatively related to growth.
– Spending in public goods not robustly correlated with
growth
• Koester- Kormendi (1989), Easterly-Rebelo
(1993):
– taxes unrelated to growth along cross-sectional
dimension
• Stokey-Rebelo (1995)
– taxes unrelated to growth along time series dimension in
the US
Issue: how to measure tax rates
Question: by how much is growth rate affected as Gov’t varies
tax rates?
•
Statutory marginal tax rates
–
–
•
Rarely used in cross-country growth regressions for they are
awkward to compute and update
Moreover, nominal tax rates often different from effective tax rates
Tax-to-GDP ratios
–
–
•
Marginal tax rate matters in theory; we only observe average
T/GDP = (T/tax base) * (tax base/GDP). Hence, tax-GDP ratios
may change independently of Gov’t action if income distribution
varies
Average effective tax rates (AETR)
–
–
Best available indicators: T / (tax base).
Computed for capital and labor incomes as well as consumption.
What if effective rates used?
•
Easterly and Rebelo (EER, 1993), AETR
for 40 countries
– No detected link with growth
•
Mendoda, Razin and Tesar (JME, 1994),
AETR for 14 Industrial countries. Updated
by DAveri and Tabellini (Economic Policy,
2000)
– Weak link with growth
Other methodological issues
•
•
•
Gov’t spending in public goods may not
reflect effective provision
‘Tax systems’ are hardly comparable, for
tax structures, degree of enforcement and
tax bases vary wildly across countries
Kneller-Bleaney-Gemmell (KBG, 1999):
most studies focus on just one side of the
budget. Both sides should be included to
avoid biasing results.
KBG (1999)
Put the Govt budget constraints in the growth
regression!
Problem: if append spending, taxes and deficit
variables
 perfect collinearity among fiscal regressors
… so?
Leave out one fiscal variable … which one???
Theory helps: eliminate a “non-affecting growth
item” to avoid the omitted variable problem
KBG (1999)
Growth= c+ j=1,..,m jXij + dcontrols + error
…eliminate the mth variable:
Growth= c+ j=1,..,(m-1) jXij + dcontrols + error
KBG (1999)
 if the m variable is omitted:
Growth= c+
+ d controls+ errors
• the null:
• coeff meaning: effect of a unit change in the relevant
variable offset by a unit change in the omitted category
the implicit financing element is the mth
Data
22 developed countries
Annual data 1970-1995
five-year avarages to remove the
effects of business cycle
KBG regression results
KBG regression results
Non distorting taxation (rndis) and non
productive spending (enprd): hypothesis of
same coefficient not rejected
Productive expenditure (eprd): positive and
significant coefficient
Distorting taxation (rdis) : negative and
significant coefficient
Budget surplus (sur): positive and significant
coefficient
Mis-specifying the Budget
Constraints
A correct specification of the Government
budget constraint is important for
interpreting fiscal parameters
• Including tax rates without budget deficit
biases estimated coefficient toward zero if
tax cuts financed in deficit
Conclusion
 Impact of fiscal policy on growth depends on the
structure of taxation and expenditure
 Non productive expenditure and non-distorting
taxation have a zero impact on growth
 Productive expenditure has a positive effect on
growth if financed by non distortionary taxation
 Distorting taxation has a negative effect on growth