Fiscal Policy, Profits, and Investment

Abstract

This paper evaluates the effects of fiscal policy on investment using a panel of OECD countries. We find a sizeable negative effect of public spending-and in particular of its wage component-on profits and on business investment. This result is consistent with different theoretical models in which government employment creates wage pressure for the private sector. Various types of taxes also have negative effects on profits, but, interestingly, the effects of government spending on investment are larger than those of taxes. Our results can explain the so-called non-Keynesian (i.e., expansionary) effects of fiscal adjustments.