Government Spending, Budget Financing, and Economic Growth: The Tunisian Experience
Author(s)
Ghali, Khalifa
Abstract
Many developing countries adopted the International Monetary Fund (IMF) debt-stabilization programs without having any clear evidence on whether public sector activities promote or depress economic growth. The existing literature on the subject did not provide a consensus judgment on which policy conclusion can safely be made. In addition, the question of whether the impact of government activities on growth depends on the source of financing the government budget is still open to debate. This paper raises these issues in the case of Tunisia, which is a small developing country implementing debt-stabilization programs without having any clear guidance on how government activities interact with macroeconomic variables in affecting its growth process. In contrast to the conventional procedure of estimating a single growth equation, this paper develops a vector error-correction model and identifies both the direct as well as the indirect channels through which government spending can affect economic growth. These effects are then analyzed depending on whether a debt financed or a tax-financed fiscal policy is followed. The empirical results suggest that government spending in Tunisia has an important role in shaping the general efficiency of the economy, whereas government reliance on debt financing has adverse effects on economic growth.
