Fiscal policy and growth: evidence from OECD countries

Is the evidence consistent with the predictions of endogenous growth models that the structure of taxation and public expenditure can affect the stead y-state growth rate? Much previous research needs to be re-evaluated becaus e it ignores the biases associated with incomplete specification of the gov ernment budget constraint. We show these biases to be substantial and, corr ecting for them, find strong support for the Barro model (1990, Government spending in a simple model of endogenous growth. Journal of Political Econo my 98 (1), s103-117, for a panel of 22 OECD countries, 1970-95. Specificall y we find that (1) distortionary taxation reduces growth, whilst non-distor tionary taxation does not; and (2) productive government expenditure enhanc es growth, whilst non-productive expenditure does not. (C) 1999 Elsevier Sc ience S.A. All rights reserved.