The composition of productive government expenditure

Abstract

PurposeRecent research supports the role of productive government spending as an important determinant of economic growth. Previous analyses have focused on the separate effects of public investment in infrastructure and on investment in education. This paper aims to introduce both types of public investment simultaneously, enabling the authors to address the trade‐offs that resource constraints may impose on their choice.Design/methodology/approachThe authors employ a two‐sector endogenous growth model, with physical and human capital. Physical capital is produced in the final output sector, using human capital, physical capital, and government spending on infrastructure. Human capital is produced in the education sector using human capital, physical capital, and government spending on public education. The introduction of productive government spending in both sectors yields an important structural difference from the traditional two‐sector growth models in that the relative price of human to physical capital dynamics does not evolve independently of the quantity dynamics.FindingsThe model yields both a long‐run growth‐maximizing and welfare‐maximizing expenditure rate and allocation of expenditure on productive capital. The welfare‐maximizing rate of expenditure is less than the growth‐maximizing rate, with the opposite being the case with regard to their allocation. Moreover, the growth‐maximizing value of the expenditure rate is independent of the composition of government spending, and vice versa. Because of the complexity of the model, the analysis of its dynamics requires the use of numerical simulations the specific shocks analyzed being productivity increases. During the transition, the growth rates of the two forms of capital approach their common equilibrium from opposite directions, this depending upon both the sector in which the shock occurs and the relative sectoral capital intensities.Research limitations/implicationsThese findings confirm that the form in which the government carries out its productive expenditures is important. The authors have retained the simpler, but widely employed, assumption that government expenditure influences private productivity as a flow. But given the importance of public investment suggests that extending this analysis to focus on public capital would be useful.Originality/valueTwo‐sector models of economic growth have proven to be a powerful tool for analyzing a wide range of issues in economic growth. The originality of this paper is to consider the relative impact of government spending on infrastructure and government spending on human capital and the trade‐offs that they entail, both in the long run and over time.

Government fiscal policy impact analysis in infrastructure sector and educa-tion sector to improve public welfare

“…From equation (18), it can be concluded several implications as follows (see also Monteiro & Turnovsky, 2008): (a) from equation (18a), that increasing the ratio of physical capital to human capital have an impact on increasing the ratio of sectoral capital. This is the implication of equation (10), namely capital intensity in both sectors move proportionally, and increasing k will increase the capital intensity in both sectors; (b) all other responses (equation 18b, 18c and 18d) depend on the relative sectoral intensity, as measured by (α 1 /α 2 -β 1 /β 2 ).…”

“…If (α 1 /α 2 -β 1 /β 2 )>0, it will increase the sector capital intensity, and then tends to reduce the return on physical capital and increasing human capital. The net effect is the increase in x and decrease in y, causing increased growth rate of physical capital and decreasing in human capital (Monteiro & Turnovsky, 2008).…”

“…With aggregating number of households as a whole, implies that per capita value of each variable represents the aggregate value. According to Monteiro & Turnovsky (2008), we assume that the population growth rate is stable, household as consumer will try to maximize the following intertemporal isoelastic satisfaction function:…”

“…Even with the allocation for education in the composition of government expenditure, it can naturally increase the level of wages and even able to create their own jobs through self-employed (namely entrepreneurship). Monteiro & Turnovsky (2008) explains that the question about optimal allocation for the two expenditure posts that previously had been tried answered in microeconomic and macroeconomic disciplines. The problem of allocation is more easily answered through a microeconomic perspective.…”

“…Each component of this economy have one common purpose, namely to maximize the level of satisfaction with various limitations that exist. In this session, we will be described how the relationship between fiscal policy and unemployment reduction objectives, how the components of the economy define their satisfaction functions, as well as how the economic equilibrium is formed (further discussion see Mankiw, 2006;Monteiro & Turnovsky, 2008).…”