The Impact of Government Debt, Expenditure and Taxes on Aggregate Investment and Productivity Growth

In this paper we evaluate empirically the impact of fiscal policy on two key determinants
of long-term growth, i.e., private investment and productivity growth. We mostly focus on a
panel of 20 OECD economies from 1970 to 2009, although we also present some estimates based
on data for 80 developing economies. Our findings suggest that high public debt adversely
affects both aggregate investment spending and productivity growth, through distortions related
to the size of the public sector. We also find weak evidence of some nonlinear effects on
productivity, with government debt becoming more detrimental when above 85-90% of GDP
in advanded economies.