A Review of Cross-Country Evidence on Government Fiscal Policy and Economic Growth

It is widely believed that fiscal policy plays an important role in determining economic growth, but the specific policies that would best foster growth are hotly debated. This study provides a review of the recent economic literature that examines the effect of government fiscal policy actions on economic growth. Because the effect of changes in tax and spending programs may take a long period of time to become evident, the findings of the studies reviewed here are based on data taken from across a large sample of countries. Despite the justifiable belief that fiscal policy does influence economic growth, interpreting the empirical evidence from aggregate cross-country data turns out to be less than straightforward. Even so, stepping back and considering the accumulated evidence reveals a robust conclusion from the data: Distortionary taxes on personal income or corporations have a strong negative effect on investment and, therefore, slow the rate of economic growth.