Government Spending, Welfare and Economic Growth

This paper examines the allocation of government tax revenue on productive government expenditure, utility-generating government expenditure and Pay-as-you-go (PAYG) social security system under different government fiscal policies. We consider utility-generating government expenditure in an overlapping generation model in which individuals survive from adulthood to old age and receive utilities from their own consumption, as well as public provided facilities. We also incorporate productive government expenditure into the production function, in which each firm produces output using capital, labor, and government spending as complementary inputs. The conclusions are summarized as, (1) regardless which fiscal policy is used; the allocation of the tax revenue in productive government expenditure is the most efficient allocation that brings benefit to growth and welfare. (2) No matter what kind of fiscal policy is used by the government, an increase in the contribution of PAYG pension system will harm the economic growth and the welfare for both generations. (3) Under different fiscal policies, the effect of the utility-generating government expenditure on the economic growth and the welfare are different.