The effects of different types of taxes and government expenditure on economic performance

Abstract

Local fiscal policy needs to take into account particular characteristics of a region and its level of development. Each locality has its own particular combination of resources, capabilities and needs. Firstly, this work estimates the impact of fiscal policy through a number of income and expenditure variables on output per capita growth and employment/unemployment using fixed-effects panel data econometric methodology in 32 states and 2,247 municipalities of Mexico from 1994 to 2010, and country data in 20 Latin American economies during the same period. Secondly, this analysis computes the impact on growth of the 1998 Federal Reform to the Fiscal Coordination System in Mexico, since it is the most significant reform in the decade regarding transfers from central to local governments. Finally, this research discusses the linkage between policy makers’ perception, public finances and the local inhabitants’ opinion regarding public services provided -considering a self-developed survey in the 32 Mexican states and Latinobarómetro surveys from 2008 to 2010.The main result in this research is that local fiscal policy is inaccurate if it does not take into account income and expenditure components simultaneously when analysing the effect of fiscal policy variables on Gross Domestic Product per capita (GDP per capita) and employment/unemployment at a sub-national level. This research intends to be a pragmatic application of fiscal policy management. My work shows that the impact of fiscal policy variables is not equal among the different levels of government. My results are consistent with Devarajan et al. (1996) that find that current expenditure can boost growth in less developed economies, and the relationship between government capital expenditure and growth is negative in developing countries due to misallocations of public spending. The current study shows that the 1998 Federal Reform has a positive effect, particularly on low income localities in Mexico, while some negative effects in more developed municipalities. According to the results of my self-developed survey in Mexico during 2014-2015, government officials considered that fiscal policy had a significant effect on growth (up to 65%) and only (2-5%) thought it was not significant. With respect to the analysis of Latinobarómetro surveys 2008-2010 for localities in Mexico, I utilise an ordered probit regression where the dependent variable reflects the response to questions regarding taxes, confidence and satisfaction of local services and the independent variables in my model are the fiscal variables. In my understanding, there has not been a similar exercise in establishing a relationship between taxpayer’s satisfaction and fiscal policy variables. My results show a lack of confidence in the local government and poor taxpayer satisfaction with municipal services.Overall, my research suggests that 1) policy makers need to account for local population needs and disparities to overcome regional inequalities; 2) a lack of local government capacity building and 3) relevance of institutional framework.

Date of Award	6 Sep 2017
Original language	English
Awarding Institution	University of Bath
Supervisor	Horst Feldmann (Supervisor) & Kerry Papps (Supervisor)