The impact of fiscal policy on economic growth in the OECD countries

Abstract

The aim of the paper is to find out what is the effect of different types of government spending and taxes on economic growth in developed economies. The analysis is performed on a sample of 27 OECD countries in the period 1997-2011. It is based on the neoclassic growth model extended with the level of human capital and fiscal variables. Those include particular types of government spending (according to the COFOG classification) and taxes (according to the OECD classification), and state budget deficit. From a methodological point of view, panel data estimation is used. We support the view that only some types of government spending are growth-enhancing, and only if they are financed through indirect taxes. However, the results show that only expenditure on defense, education and health, and general public services may be labeled as productive. In addition, we show that direct taxes, especially corporate taxes, negatively affect the growth, also in case they are used to finance productive spending.