Working Paper（25-003E）Growth Promotion Policies When Taxes Cannot Be Raised

This paper examines the growth effects of R&D subsidies and public-funded basic research in an R&D-based endogenous growth model under circumstances where the government cannot raise taxes. We show that when individuals have enough life-cycle saving motives and R&D productivity is sufficiently high, g > r holds in equilibrium and the government can finance the required expenses while perpetually rolling over the debt. Whenever possible, debt-financed R&D subsidies always enhance short-run growth. However, long-term growth is promoted only when the initial g−r gap is wide enough. Even when the long-term effect is negative, the economy may benefit from the increased GDP during a long transition to the new BGP. We confirmed that the social return to R&D is always higher than the growth rate even though g > r. In an extended model, we examine the effect of enhancing public-funded basic research and find that it is particularly effective for low-growth economies.

Keywords: Endogenous growth, Public debt, Ponzi scheme, R minus G, Research subsidy

JEL Classification Codes: O38, O41