ABSTRACT
Fiscal policy can play a signifi cant role in economic growth. In the short term, counter-cyclical fi scal expansion can help support aggregate demand and growth during cyclical downturns. Conversely, fi scal contraction can cool down an economy that is growing at an unsustainable pace and thus faces the risk of overheating. Advanced economies in particular have a long history of using taxes and government spending to smooth the business cycle. At the same time, fi scal policy can also have a major impact on medium-and long-term economic growth. This is especially true in developing economies where the private sector is relatively weak and underdeveloped. Public spending on physical infrastructure such as roads, ports, and power plants affects the productivity of all fi rms and industries and the entire economy. Likewise, public spending on education fosters human capital, a vital ingredient in long-term growth. Taxes can harm growth because they distort economic incentives and behavior; for example, corporate income taxes have a negative impact on investment. More generally, different taxes differ in the extent to which they distort incentives and behavior.
