The impact of fiscal consolidations on the functional components of government expenditures

Abstract

This paper analyses how the functional components and sub-components of government expenditures are affected by fiscal consolidations. A fixed-effects estimator is employed over a panel of 15 European Union countries during the period 1990-2012. The results show that spending on public services increases during fiscal consolidations, while spending on defence, public order, health, education and social protection is significantly cut.A more disaggregated analysis proves that fiscal consolidations are harmful for important social expenditures, in particular, for those related to citizens" safety, health assistance, social protection and investment in human capital. This evidence is even stronger in a particular group of countries, known in the literature as PIIGS. Hence, fiscal consolidations can have important implications on the living standards of the more economically vulnerable citizens.

General or central government? Empirical evidence on political cycles in budget composition using new data for OECD countries

“…An innovation of previous studies examining electoral motives and government ideology was to focus on budget composition (Bräuninger 2005, Potrafke 2006and 2011a, Enkelmann and Leibrecht 2013, Castro 2017, Castro and Martins 2018, Bojar 2019. Opportunistic politicians are likely to increase expenditure types before elections that are visible to voters.…”

“…Scholars have examined empirically how electoral motives and government ideology influence budget composition in OECD countries (Bräuninger 2005, Potrafke 2006 and 2011a, Katsimi and Sarantidis 2012, Brender and Drazen 2013, Enkelmann and Leibrecht 2013, Morozumi et al 2014, Castro 2017, Castro and Martins 2018, Bojar 2019. The latest empirical innovation based on general government data was to disentangle the ten COFOG expenditure types further; and to use the "second level" data as well which, for example, include police services, fire-protection services etc.…”

“…Leftwing governments are expected to increase spending on income redistribution (social transfers) to a larger extent than spending on public goods like public safety and order. Since the 2000s, scholars have used data on different types of public expenditure such as the OECD's Classification of Functions of Government (COFOG) to examine political cycles in budget composition (Potrafke 2006and 2011a, Enkelmann and Leibrecht 2013, Castro 2017, Castro and Martins 2018, Bojar 2019. 2 The empirical evidence is mixed -I return to these studies in section 2.…”

“…I use this new data to re-examine political cycles in budget composition in OECD countries. Using more 2 Studies on the subnational level in countries such as Canada, Germany, Portugal and India include Blais and Nadeau (1992), Galli and Rossi (2002), Potrafke (2011b), Castro andMartins (2016 and2019), Ferris and Dash (2019). Vergne (2009) uses data for developing countries.…”

The effects of fiscal consolidations on the composition of government spending

“…Taking stock of these studies, the goal of this paper is to analyze the effect of fiscal consolidations on the composition of public spending. Despite being of particular importance, given the benefits and costs associated with reducing each type of public spending, this issue remains fairly unexplored with the notable exception of Castro (2017). Compared with Castro (2017), we draw upon Alesina and Ardagna (2013)'s novel measure of fiscal consolidations that accounts for the size and the persistence of the adjustment (instead of a dummy variable as a measure of fiscal consolidations, see also De Haan et al (1996) 1 ).…”