With this paper our objective is to study the effects of different deficit policies in

an endogenous growth model with publicly funded human capital accumulation and

public debt, where we allow for heterogeneous households. Two types of households

are considered. One household acquires human capital or skills through education

while the other household remains low-skilled. Aggregate production is given by a

function with physical capital and labor as input factors, where total labor input

is modeled by a CES function with high-skilled and low-skilled labor as arguments.

The government can run into debt, but, the primary surplus is a positive function

of public debt which guarantees that public debt is sustainable. We study the

characteristics and stability of the steady state and we investigate the effects of

fiscal policy with regard to long-run growth and the distribution of welfare of the

two households. Further, we analyze growth and welfare effects of switching from

a balanced government budget to permanent public deficits taking into account

transition dynamics.