Does government spending composition matter for welfare? The case of Brazil

Abstract

The aim of this work is to contribute to studies about welfare consequences of a given structure of government expenditure by analysing the effects of two alternative measures of public spending, income transfers and investment in public capital, on household welfare. To this end, we use DSGE modeling. Our results show that government spending biased towards public investment, coupled with reduced current public expenditure, is the option yielding the greatest returns to the economy as a whole. Even though households are found to be worse off throughout a time span of 10 quarters, the larger output that ensues from this policy measure will render future generations better off. Thus, if policymakers care equally about all generations, they will elect to undertake public investments, while if more weight is attached to present generations than to future ones, they will be more willing to embark on income transfers.