Hostname: page-component-cd9895bd7-dzt6s Total loading time: 0 Render date: 2024-12-23T06:50:29.519Z Has data issue: false hasContentIssue false
  • English
  • Français

ON THE MIX OF GOVERNMENT EXPENDITURE AND TAX REVENUES

Published online by Cambridge University Press:  09 March 2020

George Economides ,
Hyun Park ,
Apostolis Philippopoulos  and
Stelios Sakkas
George Economides
Affiliation:
Athens University of Economics and Business, and CESifo
Hyun Park
Affiliation:
Kyung Hee University
Apostolis Philippopoulos*
Affiliation:
Athens University of Economics and Business, and CESifo
Stelios Sakkas
Affiliation:
European Commission, Joint Research Centre
*
Address correspondence to: Apostolis Philippopoulos, Department of Economics, Athens University of Economics and Business, 76 Patission street, Athens10434, Greece, Phone: +30-210-8203357; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

We study the implications of changes in the mix of taxes, public spending, and public finance in the Eurozone. In so doing, we build a general equilibrium OLG model that naturally incorporates all the main categories of public spending and taxes. We focus on the medium- and long-run implications of permanent reforms in the actual policy mix. When we depart from 2008, the best way out of the recession would be an increase in public spending on education and health and in turn cuts in distorting taxes including social security contributions. When we depart from the year 2017, which features a higher inherited public debt, public debt consolidation becomes the superior reform to the extent that the focus is on the medium and long run.

Keywords

Fiscal ReformsPublic Finance
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 1 , January 2022 , pp. 1 - 48
Copyright
© Cambridge University Press 2020

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

We thank the Associate Editor and two referees for constructive suggestions and criticisms. We also thank Kostas Angelopoulos, David de la Croix, Saqib Jafarey, Jim Malley, Vassilis Monastiriotis, and Waltraud Schelkle for comments and discussions. We have benefited from discussions with Harris Dellas, Vangelis Dioikitopoulos, Dimitris Papageorgiou, Rana Sajedi, and Petros Varthalitis, as well as from comments by seminar participants at the Research Workshop in European Studies at the European Institute of the LSE. Any errors are ours. Stelios Sakkas wishes to clarify that the views expressed are purely those of the authors and may not in any circumstances be regarded as stating an official position of the European Commission.

References

REFERENCES

Abington, C. and Blankenau, W. (2013) Government education expenditures in early and late childhood. Journal of Economic Dynamics and Control 37, 854–874.CrossRefGoogle Scholar
Acemoglu, D. (2009) Introduction to Modern Economic Growth. Princeton: Princeton University Press.Google Scholar
Acosta-Ormaechea, S. and Morozumi, A. (2013) Can a government enhance long-run growth by changing the composition of public expenditure? IMF Working Paper 13/162.CrossRefGoogle Scholar
Alesina, A., Favero, C. and Giavazzi, F. (2019) Austerity. Princeton: Princeton University Press.Google Scholar
Altig, D., Auerbach, A. J., Kotlikoff, L. J., Smetters, K. A. and Walliser, J. (2001) Simulating fundamental tax reforms in the US. American Economic Review 91, 574–594.CrossRefGoogle Scholar
Angelopoulos, K., Asimakopoulos, S. and Malley, J. (2019) The optimal distribution of tax burden over the business cycle. Macroeconomic Dynamics 23(6), 2298–2337.CrossRefGoogle Scholar
Angelopoulos, K., Malley, J. and Philippopoulos, A. (2012) Tax structure, growth and welfare in the UK. Oxford Economic Papers 64, 237–258.CrossRefGoogle Scholar
Angelopoulos, K., Philippopoulos, A. and Vassilatos, V. (2009) The social cost of rent seeking in Europe. European Journal of Political Economy 25, 280–299.CrossRefGoogle Scholar
Arcalean, C. and Schiopu, I. (2010) Public versus private investment and growth in a hierarchical education system. Journal of Economic Dynamics and Control 34, 604–622.CrossRefGoogle Scholar
Auerbach, J. A. and Lee, R. (2011) Welfare and generational equity in sustainable unfunded pension systems. Journal of Public Economics 95, 16–27.CrossRefGoogle ScholarPubMed
Bassetto, M. (2008) Political economy of taxation in an overlapping-generations economy. Review of Economic Dynamics 11, 18–43.CrossRefGoogle Scholar
Bhattacharya, J. and Qiao, X. (2007) Public and private expenditure on health in a growth model. Journal of Economic Dynamics and Control 31, 2519–2535.CrossRefGoogle Scholar
Blankenau, F. W. and Simpson, N. B. (2004) Public education expenditures and growth. Journal of Development Economics 73, 583–605.CrossRefGoogle Scholar
Blankenau, F. W. (2005) Public schooling, college subsidies and growth. Journal of Economic Dynamics and Control 29, 487–507.CrossRefGoogle Scholar
Bleaney, M., Gemmell, N. and Kneller, R. (2001) Testing the endogenous growth model: Public expenditure, taxation, and growth over the long run. Canadian Journal of Economics 34, 36–57.CrossRefGoogle Scholar
Bouzahzah, M., de la Croix, D. and Docquier, F. (2002) Policy reforms and growth in computable OLG economies. Journal of Economic Dynamics and Control 26, 2093–2113.CrossRefGoogle Scholar
Bruce, N. and Turnovsky, S. J. (2013) Social security, growth and welfare in overlapping generations economies with or without annuities. Journal of Public Economics 101, 12–24.CrossRefGoogle Scholar
Chakraborty, S. (2004) Endogenous lifetime and economic growth. Journal of Economic Theory 116, 119–137.CrossRefGoogle Scholar
Coenen, G., Mohr, M. and Straub, R. (2008) Fiscal consolidation in the euro area: Long-run benefits and short-run costs. Economic Modelling 25, 912–932.CrossRefGoogle Scholar
Coenen, G., Erceg, C., Freedman, C., Furceri, D., Kumhof, M., Lalonde, R., Laxton, D., Lindé, J., Mourougane, A., Muir, D., Mursula, S., de Resende, C., Roberts, J., Roeger, W., Snudden, S., Trabandt, M. and Veld, J. (2012) Effects of fiscal stimulus in structural models. American Economic Journal: Macroeconomics 4, 22–68.Google Scholar
Coenen, G., Straub, R. and Trabandt, M. (2013) Gauging the effects of fiscal stimulus packages in the euro area. Journal of Economic Dynamics and Control 37, 367–386.CrossRefGoogle Scholar
Coeurdacier, N., Guibaud, S. and Jin, K. (2015) Credit constraints and growth in a global economy. American Economic Review 105, 2838–2881.CrossRefGoogle Scholar
Conesa, C. J. and Garriga, C. (2008) Optimal fiscal policy in the design of social security reforms. Internationall Economic Review 49, 291–318.CrossRefGoogle Scholar
Cooley, F. T. (1992) Tax distortions in a neoclassical monetary economy. Journal of Economic Theory 58, 290–316.CrossRefGoogle Scholar
Cooley, F. T. and Soares, J. (1999) A positive theory of social security based on reputation. Journal of Political Economy 107, 135–160.CrossRefGoogle Scholar
Cunha, F. and Heckman, J. J. (2009) Human capital formation in childhood and adolescence. CESifo Dice Report 7, 22–28.Google Scholar
de la Croix, D. and Michel, P. (2002) A Theory of Economic Growth: Dynamics and Policy in Overlapping Generations. Cambridge: Cambridge University Press.CrossRefGoogle Scholar
Del Rey, E. and Lopez-Garcia, M.-A. (2013) Optimal education and pensions in an endogenous growth model. Journal of Economic Theory 148, 1737–1750.CrossRefGoogle Scholar
Diamond, P. (1965) National debt in a neoclassical growth model. American Economic Review 55, 1126–1150.Google Scholar
Dioikitopoulos, V. E. (2014) Ageing, growth and the allocation of public expenditures on health and education. Canadian Journal of Economics 47(4), 1173–1194.CrossRefGoogle Scholar
Docquier, F. and Paddison, O. (2003) Social security benefit rules, growth and inequality. Journal of Macroeconomics 25, 47–71.CrossRefGoogle Scholar
Economides, G., Park, H. and Philippopoulos, A. (2007) Optimal protection of property rights in a general equilibrium model of growth. Scandinavian Journal of Economics 109, 153–175.CrossRefGoogle Scholar
Economides, G., Park, H. and Philippopoulos, A. (2011) How should the government allocate its tax revenues between productivity-enhancing and utility-enhancing public goods? Macroeconomic Dynamics 15(3), 336–364.CrossRefGoogle Scholar
Economides, G. and Philippopoulos, A. (2008) Growth enhancing policy is the means to sustain the environment. Review of Economic Dynamics 11, 207–219.CrossRefGoogle Scholar
Erceg, C and Lindé, J. (2013) Fiscal consolidation in a currency union: Spending cuts vs. tax hikes. Journal of Economic Dynamics and Control 37, 422–445.CrossRefGoogle Scholar
European Central Bank (2009) ECB Monthly Bulletin, April.Google Scholar
European Central Bank (2017) ECB Economic Bulletin 5.Google Scholar
European Commission (2008) Report on Public Finances in EMU – 2008. Google Scholar
European Commission (2013) European system of accounts – ESA 2010, Luxembourg: Publications Office of the European Union, doi:10.2785/16644.CrossRefGoogle Scholar
European Commission (2014a) Report on Public Finances in EMU – 2014. Google Scholar
European Commission (2014b) Taxation Trends in the EU. Google Scholar
European Commission (2017) Report on Public Finances in EMU – 2017. Google Scholar
European Commission (2018a) Report on Public Finances in EMU – 2018. Google Scholar
European Commission (2018b) Taxation Trends in the EU. Google Scholar
European Commission (2018c) The 2018 Ageing Report, Economic and Budgetary Projections for the EU Member States, 2016–2070.Google Scholar
Garcia-Milà, T., Marcet, A. and Ventura, E. (2010) Supply side interventions and redistribution. Economic Journal 120, 105–130.CrossRefGoogle Scholar
Gemmell, N., Kneller, R. and Sanz, I. (2012) The timing and persistence of fiscal policy impacts on growth: Evidence from OECD countries. Economic Journal 121, F33–F58.CrossRefGoogle Scholar
Gemmell, N., Kneller, R. and Sanz, I. (2014) Does the composition of government expenditure matter for long-run GDP levels? Working Papers in Public Finance, Victoria Business School no. 10/2014, August.CrossRefGoogle Scholar
Glomm, G. B. R. (1992) Public versus private investment in human capital: Endogeous growth and income inequality. Journal of Political Economy 100, 818–834.lomm, G., J. Jung and C. Tran (2009) Macroeconomic implications of early retirement in the public sector: the case of Brasil. Journal of Economic Dynamics and Control 33, 777–797.CrossRefGoogle Scholar
Glomm, G., Jung, J. and Tran, C. (2018) Fiscal austerity measures: Spending cuts vs. tax increases. Macroeconomic Dynamics 22(2), 501–540.CrossRefGoogle Scholar
Heathcote, J., Storesletten, K. and Violante, G. L. (2009) Quantitative macroeconomics with heterogeneous households. Federal Reserve Bank of Minneapolis, Research Department Staff Report no. 420.Google Scholar
Kaganovich, M. and Zilcha, I. (1999) Education, social security and growth. Journal of Public Economics 71, 289–309.CrossRefGoogle Scholar
Kaganovich, M. and Zilcha, I. (2012) Pay-as-you-go or funded social security? A general equilibrium comparison. Journal of Economic Dynamics and Control 36, 455–467.CrossRefGoogle Scholar
Kneller, R., Bleaney, M. F. and Gemmell, N. (1999) Fiscal policy and growth: evidence from OECD countries. Journal of Public Economics 74, 171–190.CrossRefGoogle Scholar
Krueger, D. and Kubler, F. (2006) Pareto-improving social security reform when financial markets are inomplete!? American Economic Review 96, 737–755.CrossRefGoogle Scholar
Krueger, D. and Perri, F. (2011) Public versus private risk sharing. Journal of Economic Theory 146, 920–956.CrossRefGoogle Scholar
Lansing, J. K. (1998) Optimal fiscal policy in a business cycle model with public capital. Canadian Journal of Economics 31, 337–364.CrossRefGoogle Scholar
Lucas, R. (1990) Supply-side economics. Oxford Economic Papers 42, 293–316.CrossRefGoogle Scholar
Mendoza, G. E. and Tesar, L. L. (1998) The international ramifications of tax reforms: Supply-side economics in a global economy. American Economic Review 88, 226–245.Google Scholar
Masuch, K., Anderton, R., Setzer, R. and Benalal, N. (eds.) (2018) Structural policies in the euro area. Occasional Paper Series, no. 210, European Central Bank.CrossRefGoogle Scholar
OECD (2017) Revenue Statistics 2017: Tax Revenue Trends in the OECD. Google Scholar
Park, H. and Philippopoulos, A. (2002) Dynamics of taxes, public services, and endohgenous growth. Macroeconomic Dynamics 6(2), 187–201.CrossRefGoogle Scholar
Philippopoulos, A., Vassilatos, V. and Varthalitis, P. (2017a) Fiscal consolidation in an open economy with sovereign premia and without monetary policy independence. International Journal of Central Banking 13, 259–306.Google Scholar
Philippopoulos, A., Vassilatos, V. and Varthalitis, P. (2017b) Fiscal consolidation and its cross-country effects. Journal of Economic Dynamics and Control 83, 55–106.CrossRefGoogle Scholar
Quadrini, V. and Ríos-Rull, J.-V. (2014) Inequality in macroeconomics. In Atkinson, A.B. and Bourguignon, F. J. (eds.), Handbook of Income Distribution, vol. 2B, ch. 15. North-Holland, Amsterdam.Google Scholar
Samuelson, P. (1958) An exact consumption-loan model of interest with or without the social contrivance of money. Journal of Political Economy 66, 467–482.CrossRefGoogle Scholar
Shelton, C. (2007) The size and composition of government expenditure. Journal of Public Economics 91, 2230–2260.CrossRefGoogle Scholar
Soares, J. (2006) A dynamic general equilibrium analysis of the political economy of public education. Journal of Population Economics 19, 367–389.CrossRefGoogle Scholar
Stokey, L. N. (1996) Free trade, factor returns and factor accumulation. Journal of Economic Growth 1, 421–447.CrossRefGoogle Scholar
Turnovsky, J. S. (1995) Methods of Macroeconomic Dynamics. Cambridge, Mass: MIT Press.Google Scholar
Viaene, J.-M. and Zilcha, I. (2013) Public funding of higher education. Journal of Public Economics 108, 78–89.CrossRefGoogle Scholar
Wren-Lewis, S. (2010) Macroeconomic policy in light of the credit crunch: The return of counter-cyclical fiscal policy? Oxford Review of Economic Policy 26, 71–86.CrossRefGoogle Scholar
Yew, L. S. and Zhang, J. (2009) Optimal social security in a dynastic model with human capital externalities, fertility and endogenous growth. Journal of Public Economics 93, 605–619.CrossRefGoogle Scholar