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Does social spending affect growth?
José Luis Ramos
Jan Wozniakowski
 Fiscal policy: It is the use of government revenue
collection (mainly taxes) and expenditure (spending) to
influence the economy.
 Public expenditure: Cost of the activities of public sector
consisting on production and distribution of goods and
services, and income transference.
There are two kinds of goods and services:
 Used by people: Streets
 Used for productivity: Airport
Taxes
Quasi taxes
 Value added tax
 Obligatory social security
 Income tax
 Local taxes
(pension)
 Obligatory health insurance
 Guaranteed Employee Benefits
Fund
What effects do taxes have on the economy?
 Arrow and Kurz (1970): Created a model in which consumers derived their utility
function from consumption and public capital stock.
Assumptions:
 Public investment is productive
 Public expenditure do not affect growth rate once the steady state is reached.
 Public policy endogenous growth models are the theoretical basis of the new fiscal
policy strategy for the European Monetary Union
 HOW? By shifting the revenue stance away from distortionary forms of taxation and
switching expenditures to productive ones.
Productive expenditures (G): Those that by complementing private sector
production and generating positive externalities to firms, have a positive effect on
the marginal productivity of capital and labor. Do NOT compete with private sector
for resources.
*Public investment
*R&D
*Education
*Subsidies
*Healthcare
Unproductive expenditures (B): Those that give direct utility to households.
*Transfers to family
Y=C+I+G+(X-M)
C= (C)+C(Yd); Yd= Y–T+B
 Def. Is an economic term referring to government spending driving
down private sector spending
 Generally also have positive effects on the economy
 However some have adverse effects too.
 Ex: unemployment benefit, maternity leave
 There is for sure an effect on the economic growth, but the type of
effect in the country´s economy depends on the composition of the
public expenditure.
 Also it depends on the kind of taxation that finances the
expenditure. (Ferreiro, et. al. 2013). Empirical studies: Kneller, Bleaney, and
Gemmell 2001: Romero de Avila and Strauch 2003
 According to Keynesians productive spending would boost economic
growth in the short run, but it has no effects on the long run.
 According to classical theory, the harmful effects of taxes (and any
other forms of distortions) completely nullify the effects of spending.
 According to the Directorate-General for Economic and Financial
Affairs of the European Commission, although public spending may
have a positive impact on growth, the trend reverses when
expenditure exceeds a certain threshold. This limit is different for
each type of spending.
 A single model of growth development (based on fiscal policy) does
not exist because of social, cultural, demographic, political and
institutional differences between countries. These differences affects
the size, role and functions to be developed by national public
sectors. Bernard and Boucher 2007; Crouch and Streeck 1997; Hall and Soskice
2001; Jackson and Deeg 2008; Panic 2007; Rhodes 2005.
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