In this paper, the problem of optimum fiscal policy is discussed in terms of the techniques of optimum economic growth. The model is a simple extension of the aggregative growth model of the type introduced by Solow, Swan, and Tobin. It consists of private and public sectors, both employing labor and private capital to produce goods and services. Private goods may be either consumed or accumulated as capital, while public goods are all consumed. The public sector raises revenues by levying income taxes or by issuing money to pay wages and rentals to the labor and capital it hires to produce goods. The private sector decides how much is to be consumed and invested and how to allocate portfolio balances between real capital and money. These decisions are based upon certain behavioristic assumptions and are made in a perfectly competitive institutional setting. It will then be shown that by a proper choice of dynamic fiscal policy, which consists of income tax rates and growth rates of money supply through time, it is possible to achieve an optimal growth path corresponding to any form of social utility function and any rate of discount.

Introduction

In the postwar period, many countries, both advanced and less advanced, have come to regard fiscal policy both as an instrument to achieve short-run goals and to implement long-run objectives, such as economic growth.