The Public Sector Budget and Economic Growth in Israel

In this study we perform a time series analysis of economic growth in Israel, a country that in its short history has been characterized by sharp changes in the public sector budget deficit and its composition. We found that the endogenous growth model is more suitable for Israeli data than the classical exogenous growth model. The paper also provides a framework for dealing with unbalanced budgets in the context of the endogenous growth model. According to our theoretical model and empirical findings for Israel, the permanent taxes are a better measure than actual taxes of their influence on growth.