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Title: On Budgetary Policies and Economic Growth

Author(s): George Alogoskoufis and Frederick van der Ploeg

Publication Date: December 1990

Keyword(s): Budgetary Policy, Burden of Debt, Consumption and Endogenous Growth

Programme Area(s): International Macroeconomics

Abstract: This paper investigates the implications of budgetary policies for consumption and economic growth. We present a model that combines the Arrow-Romer endogenous growth model with the Blanchard-Yaari overlapping-generations model. We show that a rise in government debt, financed by lump-sum taxes, increases the share of private consumption to national income and reduces the long-run growth rate. We also show that a rise in government consumption financed by lump-sum taxes reduces both the share of private consumption in national income and the long-run growth rate. These results do not follow in infinite-horizon, representative-household models of endogenous growth. In such models the substitution of debt for tax finance does not affect consumption and the growth rate, and a balanced budget increase in government consumption crowds out private consumption one-for-one, without any effects on the growth rate. The paper examines the dynamic adjustment of consumption, growth and government debt to a temporary tax cut, and briefly discusses the empirical implications of the results.

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Bibliographic Reference

Alogoskoufis, G and van der Ploeg, F. 1990. 'On Budgetary Policies and Economic Growth'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=496