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This paper investigates whether government policy had a causal impact on UK output and productivity growth between 1970 and 2009. An open economy DSGE model of the UK is set up, with productivity growth determined by the tax and regulatory environment in which firms start up and operate. The agent's optimality conditions imply a reduced form linear relationship between policy and short-run productivity growth. Identification is assured for the DSGE model by the rational expectations restrictions,therefore the direction of causality is unambiguously from policy to productivity. The model is estimated and tested by Indirect Inference, a simulation-based method with good power against general misspecification. The results of this study offer robust empirical evidence that temporary changes in policies underpinning the business environment can have long-lasting effects on UK economic growth.

We show that a DSGE model in which subsidies to private sector R&D stimulate economic growth, following the predictions of semi-endogenous growth theory, can account for the joint behaviour of UK output and total factor productivity for 1981-2010. R&D subsidies are measured as government-funded R&D performed by the private sector as a proportion of total private sector R&D. We estimate and test the performance of the model using Indirect Inference, and also investigate the robustness of the results using a Monte Carlo exercise. Our findings indicate that sharp cuts in R&D subsidies tend to have highly persistent growth effects in the UK.

China's development policy since 1978 has differed across regions. With rapid aggregate growth has come widening regional inequality. The fiscal decentralisation reforms in 1994 shifted political pressure onto provincial officials to boost local growth through local public investments. These investments affect regional convergence by counteracting regulatory frictions in factor accumulation, and can also determine steady-state growth. However, the effect of public spending allocations across physical and human capital on growth and convergence processes is empirically unexplored for Chinese provinces. We take provincial time-series data on public spending by category, finding local public spending and its components augment convergence rates differently across regions. Spending on education and health contributes significantly more to growth and convergence than capital spending, confirming that the public capital-spending bias is not a local growth-optimising strategy. We suggest a policy of aligning local government promotion incentives to human capital targets to correct local resource misallocation.

Intro -- _GoBack -- _Ref310717193 -- The authors -- Foreword -- Summary -- Tables, figures and boxes -- 1 Introduction -- Philip Booth -- The growth of government spending -- Government spending, taxation and growth -- Recent trends in types of government spending -- Regional differences -- But what about austerity? -- Why does taxation affect economic growth? -- Tax and growth: the evidence -- Designing an effective tax system -- Conclusion -- References -- Part 1 -- The growth of government 1870-2020 -- 2 How should government spending and tax burdens be measured? -- David B. Smith -- Introduction -- It is government spending and not taxation that determines the burden of government activity -- No institution can tax itself -- How do we define the public sector? -- How do we define national output? -- The national accounts revolution: ESA 2010 -- Is there a best buy? -- 3 Historical trends in the government spending and tax ratios -- David B. Smith -- The international experience -- The British experience 1870-2015 -- Regional breakdown of UK government spending -- 4 And they call it austerity -- Ryan Bourne -- Introduction -- Government spending under the coalition -- Government spending under the Conservative government -- The reckoning up: government spending 2010/11 to 2019/20 -- Annex to Chapter 4 -- David B. Smith -- A misleading political myth in the austerity debate -- 5 Spending, tax and economic welfare -- David B. Smith -- Government expenditure by function -- Divergent consequences of the different forms of government spending -- Economic growth and the financing of government spending -- The size of government: maximising growth and welfare -- Conclusions -- References -- Part 2 -- Taxation and Growth: The Empirical Evidence -- 6 Tax and growth: theories and evidence -- Patrick Minford -- Introduction.