- Government spending. Real government education services grow at rates that are adjusted endogenously to ensure that real services per student grow at around 3.2 percent per year (close to the growth in GDP per capita); drawing on cross-country analysis, these per-student growth rates are slightly higher the lower the educational cycle. For other government functions – health, agricultural services, public infrastructure and the rest of the government – it is assumed that spending is a fixed share of absorption (using the base-year share).<sup>10</sup> Across the board, government investment is set to generate capital stock growth that matches the growth in real government services. Transfers from the government to households are also fixed at the base-year share of absorption.

- Government receipts and government closure. Domestic and foreign government borrowing are defined so that domestic and foreign debt stocks grow at roughly the same rate as GDP, thus maintaining stable ratios between these debt stocks and GDP. Foreign grant aid is fixed at the same share of GDP (4 percent) as in the base year. Among the taxes, import tariffs are kept at base-year rates while the rates for domestic direct and indirect taxes are scaled to clear the government budget.

- With respect to non-government links to the rest of the world, FDI and net receipts of private transfers from abroad (mostly “worker remittances”) are both fixed at the baseyear share of absorption. The balance of payments clears via adjustments in the real exchange rate.

- Domestically financed private investment is also fixed at the base-year share of absorption; adjustments in household savings (uniform point changes in the savings rates of all households) ensure that sufficient financing is available.

# _Results_

The results for the _base_ are summarized in Figures 2.1-2.4. More detailed results for these and other scenarios are shown in Tables A3.1-A3.6. Starting with macro results for the _base_ simulation, the main (but still very moderate) changes in key macro aggregates expressed as GDP shares (Figure 2.1) are a slight switch (totaling around 1 percent of GDP) from private consumption to government consumption and investment. In terms of real growth, the average annual rates are in the range of 5.0-5.6 for the key indicators (Figure 2.2), i.e. as expected also quite even given only small changes in GDP shares. The deviations (which are slight) between the picture in terms of GDP shares and growth are due to the fact that GDP shares are influenced by changes in domestic prices; most noticeably, due to a decline in its relative price, private consumption grows faster than private investment in spite of that its GDP share decreases while the GDP share of private investment is unchanged. In the background, the real

> For non-base scenarios, the GDP level is flexible whereas the productivity adjustment variable is fixed. In per-capita terms, the annual trend growth for 2000-2009 was 3.2 percent.

> 10 Although the differences often are small, it is preferable to fix payment flows relative to absorption instead of GDP. Absorption is a better measure than GDP of the capacity of an economy to spend in different areas. The two measures may grow at significantly different rates in the face of changes in net transfers, world prices, or factor incomes from abroad. For example, fixing government consumption as a share of GDP may generate significant unintended changes in the share of government consumption in total domestic final demand.

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