In this paper we analyze an endogenous growth model with human capital that

results from public educational spending. We allow for public debt and analyze

three different debt policies: a balanced government budget, a slight deficit policy

where debt grows but less than GDP, and a strong deficit policy where debt grows at

the same rate as GDP. We find that the balanced budget policy and the policy with

a slightly growing public debt are equivalent as concerns long-run economic growth.

Further, those two rules yield higher growth than a debt policy where public debt

grows at the same rate as GDP, unless the government is a creditor. As concerns

welfare, it can be demonstrated that a strong deficit policy yields lower welfare

than a balanced budget and a slight deficit, unless initial debt ratios are low and

the intertemporal elasticity of substituion is high. Finally, it is demonstrated that

there may exist an inverted U-shaped relation between welfare and deficit financed

educational spending.