Fiscal Policy & Growth

Journal of Public Economics 74 (1999) 171–190 www.elsevier.nl / locate / econbase

Fiscal policy and growth: evidence from OECD countries
Richard Kneller a , Michael F. Bleaney b , *, Norman Gemmell b a b

National Institute for Economic and Social Research, London, UK School of Economics, University of Nottingham, Nottingham, UK

Received 1 October 1998; received in revised form 1 December 1998; accepted 1 December 1998

Abstract Is the evidence consistent with the predictions of endogenous growth models that the structure of taxation and public expenditure can affect the steady-state growth rate? Much previous research needs to be re-evaluated because it ignores the biases associated with incomplete specification of the government budget constraint. We show these biases to be substantial and, correcting for them, find strong support for the Barro model (1990, Government spending in a simple model of endogenous growth. Journal of Political Economy 98 (1), s103–117, for a panel of 22 OECD countries, 1970–95. Specifically we find that (1) distortionary taxation reduces growth, whilst non-distortionary taxation does not; and (2) productive government expenditure enhances growth, whilst non-productive expenditure does not. © 1999 Elsevier Science S.A. All rights reserved.
Keywords: Growth; Government; Taxation JEL classification: H30; O40

1. Introduction Does the share of government expenditure in output, or the composition of expenditure and revenue, affect the long-run growth rate? According to the neoclassical growth models of Solow (1956) and Swan (1956), the answer is
*Corresponding author. Tel.: [phone]; fax: [phone]. E-mail address: [e-mail] (M.F. Bleaney) 0047-2727 / 99 / $ – see front matter © 1999 Elsevier Science S.A. All rights reserved. PII: S0047-2727( 99 )00022-5

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largely ‘no’. Even if the government could influence the

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