Abstract: How does the financing method of government spending affect the long-term economic growth and social welfare is an extremely important problem. From the perspective of the outside overflow of government public expenditure, this paper takes it into the social production function to construct a dynamic general equilibrium model; then from the angle of economic growth and social welfare, it compares the advantages and disadvantages of financing from capital income or from labor income. The results show that: (1) in the environment of sample economic parameter, both of the financing from labor income or from capital income present a hump shape relationship with the economic growth and the social welfare; (2) from the angle of economic growth, the marginal effect of financing from labor income is larger than the that from the capital income, and the policy effect of adjusting the labor income is stronger; (3) from the angle of social welfare, the social welfare under the capital income financing is greater than the social welfare under the labor income financing, adjusting capital income has more efficiency.

Key words: government spending; financing method; economic growth; social welfare.