Public Expenditure and Optimal Government Size in an Endogenous Growth Model: An Analysis of the Case of Argentina
28 Pages Posted: 16 Mar 2012
Date Written: March 31, 2005
By using an endogenous growth model, in which public services and facilities are subject to congestion (which occurs when output growth rate exceeds that of public spending), Rezk analyzes the relationship between public spending and the rate of economic growth. He derives the optimal government size, that is the size that maximises the per capita growth rate, for Argentina and compares it with the actual size. The results point to an actual size which is smaller than the optimal, suggesting that investment efforts should be increased, particularly in public construction which can more easily be congested by users. Moreover, the Author shows that in Argentina there is in fact room for a more efficient and better administered tax system, able to produce revenues consistent with the enlargement of the government size. In particular, Rezk argues that additional financial needs, as well as revenues required to partially eliminate highly distortionary existing taxation (such as Financial Transaction Taxes and Export Tariffs) and to settle defaulted public debt, would not alter the fiscal balance, provided that the extremely high evasion levels are reduced to more reasonable standards.
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