Government spending on education, human capital accumulation, and growth

The difference between social and private returns to education often provides the rationale for government intervention. We assess the growth implications of alternative methods of financing public spending on education in a small open economy. We develop a multisector endogenous growth model with human capital accumulation and consider several fiscal instruments to finance the increase in government spending: transfers to households, output, capital and labor taxes. We find a significant difference in the growth impact generated by the choice of the financing method. The non-distortionary financing method provides the highest output increase through its strong effect on physical and human capital stocks. The other distortionary financing methods have lower impacts on long-run economic growth, with labor tax being the most performing. Our simulation results also suggest that even though all methods of financing considered in this paper are growth-inducing in the long-run, their transitional impacts differ.