Subjective Wellbeing Impacts of National and Subnational Fiscal Policies

  • Arthur Grimes Motu Economic and Public Policy Research Trust, and Victoria University of Wellington
  • Judd Ormsby Motu Economic and Public Policy Research Trust
  • Anna Robinson
  • Siu Yuat Wong University of Auckland
Keywords: Subjective wellbeing, Fiscal policy, Decentralised government


We study the association between fiscal policy and subjective wellbeing using fiscal data on 34 countries across 129 country-years, combined with over 170,000 people’s subjective wellbeing scores. While past research has found that ‘distortionary taxes’ (e.g. income taxes) are associated with slow growth relative to ‘non-distortionary’ taxes (GST/VAT), we find that distortionary taxes are associated with higher levels of subjective wellbeing than non-distortionary taxes. This relationship holds when we control for macro-economic variables and country fixed effects. If this relationship is causal, it would offer an explanation as to why governments pursue these policies that harm economic growth. We find that richer people’s subjective wellbeing is less harmed by indirect taxes than people with lower incomes, while “unproductive expenditure” is associated with higher wellbeing for the middle class relative to others, possibly reflecting middle class capture. We see little evidence for differential effects of fiscal policy on people living in different sized settlements. Devolving a portion of expenditure to subnational government is associated with higher subjective wellbeing but devolving tax collection to subnational government is associated with monotonically lower subjective wellbeing.

Author Biographies

Arthur Grimes, Motu Economic and Public Policy Research Trust, and Victoria University of Wellington

Senior Fellow, Motu Research

Adjunct Professor, Victoria University of Wellington

Judd Ormsby, Motu Economic and Public Policy Research Trust
Research Analyst


Alesina, Alberto, and Dani Rodrik. 1994. “Distributive Politics and Economic Growth.” The Quarterly Journal of Economics 109 (2): 465–90.

“AMECO.” 2015.

Angelopoulos, Konstantinos, George Economides, and Pantelis Kammas. 2007. “Tax-Spending Policies and Economic Growth: Theoretical Predictions and Evidence from the OECD.” European Journal of Political Economy 23 (4): 885–902. doi:10.1016/j.ejpoleco.2006.10.001.

Baier, Scott L, and Gerhard Glomm. 2001. “Long-Run Growth and Welfare Effects of Public Policies with Distortionary Taxation.” Journal of Economic Dynamics and Control 25 (12): 2007–42.

Barro, Robert J. 1990. “Government Spending in a Simple Model of Endogeneous Growth.” Journal of Political Economy 98 (5): S103–25.

Barro, Robert J., and Xavier Sala-i-Martin. 1992. “Public Finance in Models of Economic Growth.” The Review of Economic Studies 59 (4): 645–61.

Berry, Brian JL, and Adam Okulicz-Kozaryn. 2009. “Dissatisfaction with City Life: A New Look at Some Old Questions.” Cities 26 (3): 117–24.

———. 2011. “An Urban-Rural Happiness Gradient.” Urban Geography 32 (6): 871–83.

Bjørnskov, Christian, Axel Dreher, and Justina AV Fischer. 2007. “The Bigger the Better? Evidence of the Effect of Government Size on Life Satisfaction around the World.” Public Choice 130 (3): 267–92.

Bleaney, Michael, Norman Gemmell, and Richard Kneller. 2001. “Testing the Endogenous Growth Model: Public Expenditure, Taxation, and Growth over the Long Run.” Canadian Journal of Economics, 36–57.

Case, Anne, and Angus Deaton. 2015. “Suicide, Age, and Wellbeing: An Empirical Investigation.” Working Paper 21279. National Bureau of Economic Research.

Clark, Andrew E., Ed Diener, Yannis Georgellis, and Richard E. Lucas. 2008. “Lags And Leads in Life Satisfaction: A Test of the Baseline Hypothesis.” Economic Journal 118 (529): F222–43.

Daly, Mary C, and Daniel J Wilson. 2009. “Happiness, Unhappiness, and Suicide: An Empirical Assessment.” Journal of the European Economic Association 7 (2-3): 539–49.

Daly, Mary C, Daniel J Wilson, and Norman J Johnson. 2013. “Relative Status and Well-Being: Evidence from US Suicide Deaths.” Review of Economics and Statistics 95 (5): 1480–1500.

Diener, Ed, and Micaela Y Chan. 2011. “Happy People Live Longer: Subjective Well-Being Contributes to Health and Longevity.” Applied Psychology: Health and Well-Being 3 (1): 1–43.

Diener, Ed, Ronald Inglehart, and Louis Tay. 2013. “Theory and Validity of Life Satisfaction Scales.” Social Indicators Research 112 (3): 497–527.

Di Tella, Rafael, Robert J MacCulloch, and Andrew J Oswald. 2003. “The Macroeconomics of Happiness.” Review of Economics and Statistics 85 (4): 809–27.

Donnelly, Michael, and Grigore Pop-Eleches. 2012. “The Questionable Validity of Income Measures in the World Values Survey.” In Prepared for the Princeton University Political Methodology Seminar.

Easterlin, Richard A, Laura Angelescu, and Jacqueline S Zweig. 2011. “The Impact of Modern Economic Growth on urban–Rural Differences in Subjective Well-Being.” World Development 39 (12): 2187–98.

EVS. 2011. “European Values Study Longitudinal Data File 1981-2008.” ZA4804 Version 2.0.0. Cologne: GESIS.

Feenstra, Robert C., Robert Inklaar, and Marcel P. Timmer. 2015. “The Next Generation of the Penn World Table.” American Economic Review forthcoming.

Flavin, Patrick, Alexander C Pacek, and Benjamin Radcliff. 2011. “State Intervention and Subjective Well-Being in Advanced Industrial Democracies.” Politics & Policy 39 (2): 251–69.

———. 2014. “Assessing the Impact of the Size and Scope of Government on Human Well-Being.” Social Forces, sou010.

Futagami, Koichi, Akihisa Shibata, and Yuichi Morita. 1993. “Dynamic Analysis of an Endogenous Growth Model with Public Capital.” The Scandinavian Journal of Economics 95 (4): 607–25.

Grimes, Arthur, and Marc G Reinhardt. 2015. “Relative Income and Subjective Wellbeing: Intra-National and Inter-National Comparisons by Settlement and Country Type.” Working Paper 15-10. Motu Economic and Public Policy Research.

Helliwell, John F. 2007. “Well-Being and Social Capital: Does Suicide Pose a Puzzle?” Social Indicators Research 81 (3): 455–96.

Helliwell, John F, and Haifang Huang. 2008. “How’s Your Government? International Evidence Linking Good Government and Well-Being.” British Journal of Political Science 38 (4): 595.

Hessami, Zohal. 2010. “The Size and Composition of Government Spending in Europe and Its Impact on Well-Being.” Kyklos 63 (3): 346–82.

International Monetary Fund (IMF). 2014. “Government Finance Statistics.”

Kneller, Richard, Michael F Bleaney, and Norman Gemmell. 1999. “Fiscal Policy and Growth: Evidence from OECD Countries.” Journal of Public Economics 74 (2): 171–90.

Layard, Richard. 2005. “Happiness: Lessons Form a New Science.” London: Allen Lane.

Lucas, Robert E. 1988. “On the Mechanics of Economic Development.” Journal of Monetary Economics 22 (1): 3–42.

Misch, Florian, Norman Gemmell, and Richard Kneller. 2013. “Growth and Welfare Maximization in Models of Public Finance and Endogenous Growth.” Journal of Public Economic Theory 15 (6): 939–67.

Morrison, Philip S. 2011. “Local Expressions of Subjective Well-Being: The New Zealand Experience.” Regional Studies 45 (8): 1039–58.

Nijkamp, Peter, and Jacques Poot. 2004. “Meta-Analysis of the Effect of Fiscal Policies on Long-Run Growth.” European Journal of Political Economy 20 (1): 91–124.

OECD. 2014. “OECD Government Finance Statistics.”

Oishi, Shigehiro, Ulrich Schimmack, and Ed Diener. 2011. “Progressive Taxation and the Subjective Well-Being of Nations.” Psychological Science, 0956797611420882.

Ram, Rati. 2009. “Government Spending and Happiness of the Population: Additional Evidence from Large Cross-Country Samples.” Public Choice 138 (3-4): 483–90.

Rebelo, Sergio. 1991. “Long-Run Policy Analysis and Long-Run Growth.” The Journal of Political Economy 99 (3): 500–521.

Romer, Paul M. 1986. “Increasing Returns and Long-Run Growth.” The

Journal of Political Economy 94 (5): 1002–37.

———. 1988. “Capital Accumulation in the Theory of Long Run Growth.” University of Rochester-Center for Economic Research (RCER).

Schwarz, Norbert. 1987. “Stimmung Als Information: Untersuchungen Zum Einfluß von Stimmungen Auf Die Bewertung Des Eigenen Lebens.” Heidelberg: Springer Verlag.

The United Nations. 2015. “UN Data.”

The World Bank. 2015a. “World Bank Development Indicators 2014,” April.

———. 2015b. “Consumer Price Index for Argentina.” FRED, Federal Reserve Bank of St. Louis. October 2.

———. 2015c. “World Bank Development Indicators 2015,” October.

Turnovsky, Stephen J. 2000. “Fiscal Policy, Elastic Labor Supply, and Endogenous Growth.” Journal of Monetary Economics 45 (1): 185–210.

Urry, Heather L, Jack B Nitschke, Isa Dolski, Daren C Jackson, Kim M Dalton, Corrina J Mueller, Melissa A Rosenkranz, Carol D Ryff, Burton H Singer, and Richard J Davidson. 2004. “Making a Life Worth Living Neural Correlates of Well-Being.” Psychological Science 15 (6): 367–72.

Veenhoven, Ruut. 1994. “How Satisfying Is Rural Life? Fact and Value.” In Changing Values and Attitudes in Family Households, Implications for Institutional Transition in East and West’, edited by Cecora, J, 41–51. Bonn, Germany: Society for agricultural policy research in rural.

———. 2000. “Well-Being in the Welfare State: Level Not Higher, Distribution Not More Equitable.” Journal of Comparative Policy Analysis: Research and Practice 2 (1): 91–125.

World Values Survey Association. 2014. “World Values Survey 1981-2014 Longitudinal Aggregate v.20141125.” November 25.

How to Cite
Grimes, A., Ormsby, J., Robinson, A. and Wong, S. Y. (2016) “Subjective Wellbeing Impacts of National and Subnational Fiscal Policies”, REGION, 3(1), pp. 43-69. doi: 10.18335/region.v3i1.121.