Fiscal Policy, Private Investment and Economic Growth: Evidence from G-7 Countries

Abstract:     
Measuring the effects of fiscal policy on economic growth is difficult, because fiscal policy variables are influenced by changes in income. This paper uses an unbalanced panel data set for G-7 countries for the period 1965-2000 that includes annual estimates of cyclically adjusted government expenditures, capital outlays, income tax revenues, indirect tax revenues, corporate tax revenues and social security tax revenues, based on definitions developed by OECD revenue statistics. The percentage share of these estimates in GDP is used to investigate the effects of fiscal policy on economic growth, and results are compared with regression results that use 5-year averages of cyclically unadjusted variables. The empirical results from both sets of regressions suggest that only taxes on household income and government expenditures have negative effects on per capita income growth. We consolidate our findings by showing that both government expenditures and income taxes have distortionary effects on private investment.

Number of Pages in PDF File: 27

Keywords: Fiscal Policy, Economic Growth, Cyclical Adjustment

JEL Classification: O23, H30

working papers series