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The Effect of the Size and the Mix of Public Spending on Growth and Inequality

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  • Jean-Marc Fournier
  • Åsa Johansson

Abstract

This paper provides evidence on the effects of the size and the composition of public spending on long-term growth and inequality. An estimated baseline convergence model captures the long-term effect of human capital and total investment on potential output for a panel of OECD countries. The composition of public spending added to this baseline provides evidence that certain public spending items (public investment and education) boost potential growth, while others (pensions and public subsidies) lower potential growth. There is also evidence that too large governments reduce potential growth, unless the functioning of government is highly effective. This paper also investigates the effect of public spending items on income inequality. Increasing the size of government, family benefits or subsidies decreases inequality. Reforms making the government more effective and an education reform that aims at encouraging completion of secondary education may also decrease income inequality. Simulations combining both growth and distributional effects illustrate that most reforms can deliver considerable growth gains and benefit the poor. L’effet de la taille et de la composition des dépenses publiques sur la croissance et les inégalités Cet article fournit des preuves empiriques sur les effets de la taille et de la composition des dépenses publiques sur la croissance à long terme et les inégalités. Un modèle de convergence de base mesure l’effet à long terme du capital humain et de l’investissement total sur la production potentielle pour un panel de pays de l’OCDE. La composition des dépenses publiques ajoutée à ce modèle de base montre que certains postes de dépenses publiques (investissements publics et éducation) stimulent la croissance potentielle, tandis que d’autres (pensions et subventions publiques) diminuent la croissance potentielle. Il est également prouvé que des gouvernements trop importants réduisent la croissance potentielle, à moins que le fonctionnement du gouvernement soit très efficace. Cet article examine également l’effet des dépenses publiques sur les inégalités de revenus. Augmenter la taille du gouvernement, les prestations familiales ou les subventions diminue les inégalités. Les réformes rendant le gouvernement plus efficace et une réforme de l’éducation qui vise à encourager l’achèvement de l’enseignement secondaire peuvent également réduire les inégalités de revenus. Des simulations combinant les effets de croissance et de distribution montrent que la plupart des réformes peuvent générer des gains de croissance considérables et bénéficier aux pauvres.

Suggested Citation

  • Jean-Marc Fournier & Åsa Johansson, 2016. "The Effect of the Size and the Mix of Public Spending on Growth and Inequality," OECD Economics Department Working Papers 1344, OECD Publishing.
    • Handle: RePEc:oec:ecoaaa:1344-en
    DOI: 10.1787/f99f6b36-en
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    References listed on IDEAS

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    More about this item

    Keywords

    government size; growth; income inequality; public spending;
    All these keywords.

    JEL classification:

    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H52 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Education
    • H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs

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