Fiscal Policy in a Growth Framework

This paper assesses recent theorising and empirical evidence on the impact of fiscal policy—taxes, public expenditures and budget deficits—on long-run growth. It considers the relevance of recent advances in growth theory for low-income countries and compares the evidence for low-income countries with that for middleand highincome (OECD) countries. Recent advances in endogenous growth theory have demonstrated that fiscal policy can have long-run effects on economic growth rates where some taxes distort investment decisions in the private sector (negative effect) and/or where some ‘productive’ public expenditures compliment private investment (positive effect). Increasing budget deficits can be expected to reduce long-run growth rates, unless tax-payers fully anticipate fiscal policy changes and adjust their savings behaviour accordingly—a condition unlikely to hold in low-income countries. Recent theory particularly stresses the importance for growth of the following. .../...