Budget policy, capital formation and steady growth

Summary

The overall size of the deficit or surplus in the government budget has lost much of its meaning in the analysis of the short-run effects of fiscal policy, whereas in the analysis of the long-run effects it maintains a certain importance, for it can affect the growth path of the economic system.

The present study is conducted in the framework of a one-sector growth model, where government activity is represented by simple expenditure and tax functions; the effects of alternative budget policies on the size and the allocation of saving and investment carried out in the economic system and the conditions for steady state growth are examined.

Some important issues of public finance theory and fiscal policy are thereby clarified, such as the conditions for a neutral budget policy, the burden of the public debt on future generations, and the fiscal remedies against a process of cost-push inflation.

The introduction of monetary variables into the model allows a more general analysis of the equilibrium of the economic system, including the determination of the price level and of the rate of interest on public bonds.