Does it Pay to Have a Balanced Government Budget?

27 Pages Posted: 12 Jan 2007 Last revised: 30 Dec 2012

See all articles by Alfred Greiner

Alfred Greiner

Bielefeld University - Department of Business Administration and Economics

Date Written: January 9, 2007

Abstract

This paper presents an endogenous growth model with public capital and public debt. The government finances productive and unproductive public spending through income taxation and through public deficits. In addition, the primary surplus to GDP ratio is set such that it is a positive function of the debt ratio which is a necessary condition for the inter-temporal budget constraint of the government to be fulfilled. The paper then studies growth and welfare effects of the model assuming a balanced government budget and compares the outcome to the scenario where public debt grows in the long-run, but at a smaller rate than capital and consumption, and to the scenario where public debt grows at the same rate as capital and consumption. The analysis is undertaken both for the model on the balanced growth path as well as for the model on the transition path.

Keywords: Public Debt, Inter-temporal Budget Constraint, Public Capital, Endogenous Growth

JEL Classification: E62, H60, H54

Suggested Citation

Greiner, Alfred, Does it Pay to Have a Balanced Government Budget? (January 9, 2007). Available at SSRN: https://ssrn.com/abstract=956252 or http://dx.doi.org/10.2139/ssrn.956252

Alfred Greiner (Contact Author)

Bielefeld University - Department of Business Administration and Economics ( email )

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