Fiscal policy and social infrastructure provision under alternative growth and distribution regimes

By Hiroshi Nishi, Kazuhiro Okuma

PKES Working Paper 2304

March 2023

Recent crises show that the market economy does not function autonomously but needs re-silient social, natural, and institutional foundations. Accordingly, fiscal sustainability cannot be ignored, and the government’s role in fiscal policy and social infrastructure provision is becoming increasingly important. We build a Kaleckian dynamic model that can comprehen-sively analyse the growth, distribution, and employment rate of the government’s social infra-structure and debt accumulation under alternative growth and distribution regimes. The model allows for not only wage-led growth (WLG) and profit-led growth (PLG) regimes but also labour-market-led (LML) and goods-market-led (GML) distribution regimes. Particular attention is paid to the demand effects of fiscal policy and productivity growth effect of social infrastructure investment. Our model derives the following results. A combination of alterna-tive growth and distribution regimes is important for stability. This demonstrates that the cy-clical behaviours of the WLG/GML and PLG/LML regimes are highly contrasting. When gov-ernment debt also changes in the long run, the Domar condition is required for stability. In contrast to the principally Kaleckian nature, the long-run economic growth rate depends not on demand or fiscal parameters but on supply side parameters determining the natural growth rate. Based on these results, we explain that the government can still play an im-portant role in stabilising the economy, improving the quality of social infrastructure, and achieving a resilient economy.

Keywords: Fiscal policy, social infrastructure, Kaleckian model, growth regime, distribution regime

JEL classification: E11 E12 E25 H54 O40