GROWTH, WELFARE, AND THE SIZE OF GOVERNMENT

Using an endogenous growth model in which government purchases directly affect aggregate productivity and utility, fiscal policy experiments conducted here indicate that the macroeconomic effects of changes in fiscal policy are at least as sensitive to the mix of spending cuts as they are to the mix of tax cuts. In fact, reducing the size of the government actually reduces growth and welfare freductions in government expenditures are heavily weighted towards reductions in public capital or if the proceeds are not used to reduce capital taxation. In addition, across-the-board spending cuts are not likely to significantly improve growth and welfare. ( JEL E62, 041)