We present an endogenous growth model with human capital and learning by doing. Human capital is not an input factor in the production process of final output but it affects the ability to build up knowledge capital as a by-product of cumulated investment (learning by doing). Human capital is formed in the schooling sector that is financed by the government. The government may run into debt but obeys the inter-temporal budget constraint. The article analyzes the structure of the model and studies the effects of different budgetary policies as regards the balanced growth rate, transition dynamics and with respect to welfare.