Working Paper BETA #2015-25

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Title : Government expenditure, external and domestic public debts, and economic growth.

Author(s) : Duc-Anh Le, Cuong Le Van, Phu Nguyen-Van, Amélie Barbier-Gauchard

Abstract : This paper analyzes the relationship between government expenditure, tax on returns to asset, public debt, and economic growth. Public debt is composed of two components, domestic debt and external debt. We show that an increase in the tax rate on returns to asset leads to an increase in government expenditure, consumption, and domestic debt. However, the impact of tax rate on external debt is unclear. In some situation, in particular when the productivity of capital on production is low (high) and the tax rate is lower (higher) than a threshold, the relation between external debt and the tax rate has a bell-shaped form, i.e. external debt firstly rises then decreases with the tax rate.

Key-words : Taxation; public expenditure; domestic debt; external debt; growth.

JEL Classification : H50; H63; O40