1. THE ACADEMY OF ECONOMIC STUDIES, BUCHAREST DOCTORAL SCHOOL OF FINANCE AND BANKING DISSERTATION PAPER Fiscal Policy and Economic Growth in European Union Countries MSc Student: Zoescu Mihai Supervisor: Professor Moisă Altăr BUCHAREST, JULY 2003

2. 1.Empirical Evidence 2.Theoretical Background 3.Methodology 4.Data 5.Estimation Results 6.Conclusions

3. Ram (1986)  115 countries - 1960-1980 (Summers-Heston database)  estimations for each country based on time-series  positive impact of government size in 100 cases  positive impact of marginal government size in 98 cases 1.Empirical Evidence Barro (1991)  cross-country evidence on 98 countries, 1960-1985 (Summers-Heston database)  growth inversely related to the share of government consumption in GDP  growth insignificantly related to the share of public investment

4. Folster and Henrekson (2000)  panel study on OECD sample, 1970–95 period  government consumption is significantly negatively related to growth  robust negative relationship between government expenditure and growth Heitger (2001)  panel estimates for 21 OECD countries, 1960–2000  negative and statistically highly significant relation government expenditures - economic growth  all subcategories of consumptive government expenditures: significantly negative impact

5. 2.Theoretical Background  endogenous growth  constant returns to a broad concept of capital Y=Ak  constant returns to scale in k and g together but diminishing returns in k separately Barro (1990)

6. 0 20 40 60 80 100 Government (tax) share Growth rate

7. Panel data Advantages:  double dimension a better representation of the dynamic behavior of the individuals takes into account individuals heterogeneity  data are numerous the biases and the variance of estimation go to zero are very precise Inconveniences:  the existence of aberrant observations  missing observations 3.Methodology

8. 4.The Data  annual data for the EU countries from 1977 till 1997 Source : World Bank, 2002, World Development Indicators SymbolVariable name GDPReal gross domestic product growth per capita GCONSGeneral government final consumption expenditure as percent of gross domestic product TEXPGovernment total expenditure as percent of gross domestic product REVGovernment tax revenues as percent of gross domestic product CAPFGross fixed capital formation as percent of gross domestic product DGCONSGCONS change in percentage points DTEXPTEXP change in percentage points DREVREV change in percentage points DCAPFCAPF change in percentage points

9. (1)(2) Dep. var.GDP No. obs.315 Const.0.0235 (24.35)0.0234 (23.12) DGCONS-1.2133 (-8.17)- DTEXP--0.2848 (-5.49) DREV-0.1607 (-2.14)-0.1235 (-1.48) DCAPF0.7271 (10.39)0.6937 (8.99) R2R2 0.420.36 0.01670.0175 5.Estimation Results

12. (1)(2) FEREFERE Dep. var.GDP DGCONS-1.2286 (-9.01)-1.2264 (-9.05)-- DTEXP---0.2657 (-5.56)-0.2702 (-5.64) DREV-0.1832 (-2.68)-0.1802 (-2.65)-0.1547 (-2.01)-0.1472 (-1.90) DCAPF0.7254 (11.47)0.7257 (11.53)0.7005 (9.85)0.6989 (9.79) R2R2 0.550.540.490.46 0.01500.01490.01610.0162 Fixed Effects vs. Random Effects Hausman Test test statistics are -0.025 respectively 0.021. critical value at 5% level

13. Dependent Variable: GDP? Method: Pooled Least Squares Sample(adjusted): 1977 1997 Included observations: 21 after adjusting endpoints Number of cross-sections used: 15 Total panel (balanced) observations: 315 VariableCoefficientStd. Errort-StatisticProb. D(CAPF?)0.7254860.06320411.478420.0000 D(GCONS?)-1.2286270.136293-9.0145690.0000 D(REV?)-0.1832710.068199-2.6873080.0076 _AUT--C0.0221140.0032856.7316850.0000 _BEL--C0.0203680.0032836.2046280.0000 _DEN--C0.0179920.0032855.4772890.0000 _FIN--C0.0271670.0032988.2362910.0000 _FRA--C0.0218540.0032936.6353660.0000 _GER--C0.0180520.0032805.5032600.0000 _GRE--C0.0122650.0032843.7349470.0002 _IRE--C0.0403290.00329312.248110.0000 _ITA--C0.0261520.0033237.8699030.0000 _LUX--C0.0369650.00328011.268580.0000 _NED--C0.0146320.0032844.4551220.0000 _POR--C0.0333210.00330310.087480.0000 _SPA--C0.0269090.0033028.1485800.0000 _SWE--C0.0156940.0032864.7752370.0000 _UK--C0.0196190.0032925.9605050.0000 R-squared0.559056 Mean dependent var0.021169 Adjusted R-squared0.533816 S.D. dependent var0.021994 S.E. of regression0.015017 Sum squared resid0.066979 Log likelihood884.8459 F-statistic22.15025 Durbin-Watson stat1.587439 Prob(F-statistic)0.000000

14. Dependent Variable: GDP? Method: Pooled Least Squares Sample(adjusted): 1977 1997 Included observations: 21 after adjusting endpoints Number of cross-sections used: 15 Total panel (balanced) observations: 315 VariableCoefficientStd. Errort-StatisticProb. D(CAPF?)0.7005920.0710709.8578190.0000 D(TEXP?)-0.2657340.047714-5.5693410.0000 D(REV?)-0.1547690.076941-2.0115330.0452 _AUT--C0.0217310.0035276.1606150.0000 _BEL--C0.0204120.0035265.7894220.0000 _DEN--C0.0181640.0035275.1494350.0000 _FIN--C0.0257540.0035377.2808450.0000 _FRA--C0.0205420.0035315.8172090.0000 _GER--C0.0192910.0035245.4737970.0000 _GRE--C0.0111670.0035233.1698040.0017 _IRE--C0.0420330.00352611.921390.0000 _ITA--C0.0261870.0035687.3384080.0000 _LUX--C0.0366660.00352310.407820.0000 _NED--C0.0165920.0035194.7148580.0000 _POR--C0.0308100.0035328.7222620.0000 _SPA--C0.0252350.0035377.1339600.0000 _SWE--C0.0165460.0035314.6858620.0000 _UK--C0.0216120.0035236.1341150.0000 R-squared0.491513 Mean dependent var0.021169 Adjusted R-squared0.462407 S.D. dependent var0.021994 S.E. of regression0.016126 Sum squared resid0.077239 Log likelihood862.3989 F-statistic16.88738 Durbin-Watson stat1.784239 Prob(F-statistic)0.000000

15. (1)(2) OLSGMMOLSGMM Dep. var.GDP GDP(-1)0.2180 (4.95)0.1889 (2.52)0.1383 (2.88)0.1504 (1.19) DGCONS-1.3301 (-10.01)-1.3189 (-9.13)-- DTEXP---0.2597 (-5.50)-0.2750 (-3.55) DREV-0.1976 (-3.00)-0.1933 (-2.98)-0.1741 (-2.28)-0.1818 (-1.77) DCAPF0.5723 (8.38)0.5848 (6.35)0.6126 (8.00)0.6020 (5.02) R2R2 0.59 0.50 0.0144 0.0159  Ahn and Schmidt (1993) - GMM estimator  Balestra and Nerlove (1966) OLS vs. GMM Hausman Test test statistics are 0.40 respectively 0.37 critical value

16. Model (1)

17. Model (2)

18. (1)(2) Dep. var.GDP GDP(-1)0.1937 (4.61)0.1227 (2.82) DGCONS-1.2013 (-9.90)- DTEXP--0.3085 (-4.41) DREV-0.1901 (-3.37)-0.1748 (-2.42) DCAPF0.6503 (7.93)0.6910 (7.78) R2R2 0.600.53 0.01440.0158 Fixed Effects with Cross Section Weights

19. 6.Conclusions  tax rates have a negative impact on economic growth  the level of tax rates is beyond the optimum point  the relation: government expenditures - economic growth is negative and highly significant  government expenditures are situated above the point of maximum economic growth  government consumption has a much greater negative impact on output growth than total government expenditure

20. Shortcomings:  economic growth has many determinants  data with measurement errors  tax revenues as proxy for tax rates  government total expenditure separated on types

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