Public spending, public funds, and growth dynamics
Escobar Posada, Rolando Alfredo
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This dissertation is comprised of two chapters. In the first chapter, we develop an endogenous growth model with private physical capital, human capital and infrastructures defined as public capital, i.e. a stock variable. Infrastructures affect not only the production of final output, but also human capital. We analyze the impact of government investment and composition on growth and welfare, and derive the growth maximizing level of public investment and composition. We show that at the growth-maximizing composition, an increase in the fraction of government spending allocated to final output will increase steady-state welfare, implying that the welfare maximizing share of productive government expenditure is larger than the growth-maximizing share. Also, at the growth maximizing level of public investment, an increase in total public investment will reduce welfare, implying that the welfare maximizing share of output spent by the government is less than the growth-maximizing share. Moreover, we show not only that this conclusion is qualitatively similar to the flow specification of public spending, but also that the long-run growth maximizing fraction of total investment and composition is the same for both stock and flow regimes. However, this conclusion does not extend to the transitional dynamics and thus we do some simulations to examine the transitional dynamics following an increase in productivity, and contrast these with the flow specification. In the second one, we address the issue of financing and allocating productive public spending in the presence of an excludable input, i.e. higher education. We develop an endogenous growth model with private physical capital, human capital and the government. The government has three tax instruments at its disposal and decides both the revenue policy and how to allocate spending between excludable and non-excludable public inputs. The excludability nature of the input lies in the imposition of user costs so that its provision is not "free of charge", as opposed to tax-payers financing. The analysis focuses not only on the growth effects of the expenditure mixture but also on the growth and budgetary consequences of different tax and spending arrangements. We show that there exists a trade-off between income taxes and the intertemporal budget deficit. Conversely, a compensated expenditure switch, though it affects both user fees and growth, may have little effect on the intertemporal deficit. Therefore, if the government is seeking to support higher education while keeping the deficit on target, a policy involving changes in expenditure may be preferred.
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