What Do OECD Countries Cut First When Faced with Fiscal Adjustments?
AbstractFollowing the present scale of fiscal imbalances in developed countries, significant fiscal consolidation will be inevitable in the coming years. Fiscal discipline will require cuts in government expenditure, leading to trade-offs between different components of government expenditure. In this article, we explore the relationship between components of government expenditure and government size during the period 1970–2007 for a sample of 25 developed countries to shed light on how fiscal discipline might influence public spending composition in the coming years. Using the Pooled Mean Group estimation we find that fiscal adjustments protect functions that have both a social and productive character, such as education and health spending. In addition, the most productive spending, that related to transport and communications, is also isolated from budgetary cuts. This result shows evidence of governments reacting to the voter’s increasing realization that reducing productive expenditures harms long-term economic growth by striking a balance between utility and economic-growthenhancing expenditure.
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Bibliographic InfoArticle provided by Southern Economic Association in its journal Southern Economic Journal.
Volume (Year): 77 (2011)
Issue (Month): 3 (January)
Find related papers by JEL classification:
- H10 - Public Economics - - Structure and Scope of Government - - - General
- H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
- C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
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- Richard J. Cebula, 2013. "Budget Deficits, Economic Freedom, and Economic Growth in OECD Nations: P2SLS Fixed-Effects Estimates, 2003â€“2008," Journal of Private Enterprise, The Association of Private Enterprise Education, The Association of Private Enterprise Education, vol. 28(Spring 20), pages 75-96.
- Crafts, Nicholas, 2012.
"Western Europe’s Growth Prospects: an Historical Perspective,"
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71, Competitive Advantage in the Global Economy (CAGE).
- Crafts, Nicholas, 2012. "Western Europe's Growth Prospects: an Historical Perspective," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8827, C.E.P.R. Discussion Papers.
- Robert A Buckle & Amy A Cruickshank, 2013. "The Requirements for Long-Run Fiscal Sustainability," Treasury Working Paper Series 13/20, New Zealand Treasury.
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