1887

OECD Economics Department Working Papers

Working papers from the Economics Department of the OECD that cover the full range of the Department’s work including the economic situation, policy analysis and projections; fiscal policy, public expenditure and taxation; and structural issues including ageing, growth and productivity, migration, environment, human capital, housing, trade and investment, labour markets, regulatory reform, competition, health, and other issues.

The views expressed in these papers are those of the author(s) and do not necessarily reflect those of the OECD or of the governments of its member countries.

English, French

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

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.

English

Keywords: growth, income inequality, public spending, government size
JEL: D31: Microeconomics / Distribution / Personal Income, Wealth, and Their Distributions; H52: Public Economics / National Government Expenditures and Related Policies / National Government Expenditures and Education; H54: Public Economics / National Government Expenditures and Related Policies / National Government Expenditures and Related Policies: Infrastructures; Other Public Investment and Capital Stock; O40: Economic Development, Innovation, Technological Change, and Growth / Economic Growth and Aggregate Productivity / Economic Growth and Aggregate Productivity: General; H50: Public Economics / National Government Expenditures and Related Policies / National Government Expenditures and Related Policies: General; H55: Public Economics / National Government Expenditures and Related Policies / Social Security and Public Pensions; H53: Public Economics / National Government Expenditures and Related Policies / National Government Expenditures and Welfare Programs
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