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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. THANK YOU!