Fiscal policy, expenditure composition, and growth in low-income countries

This paper assesses the effects of fiscal consolidation and expenditure composition on economic growth in a sample of 39 low-income countries during the 1990s. The paper finds that strong budgetary positions are generally associated with higher economic growth in both the short and long terms. The composition of public outlays also matters: countries where spending is concentrated on wages tend to have lower growth, while those that allocate higher shares to capital and nonwage goods and services enjoy faster output expansion. Finally, initial fiscal conditions also have a bearing on the nexus between fiscal deficits and growth. (c) 2005 Elsevier Ltd. All rights reserved.