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What Do OECD Countries Cut First When Faced with Fiscal Adjustments?


Author Info

  • Ismael Sanz

    (Applied Economics I, Universidad Rey Juan Carlos, Campus de Vicalvaro, Paseo artilleros s/n, 28032 Madrid, Spain)


Following 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 Info

Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 77 (2011)
Issue (Month): 3 (January)
Pages: 753-775

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Handle: RePEc:sej:ancoec:v:77:3:y:2011:p:753-775

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Cited by:
  1. Richard J. Cebula, 2013. "Budget Deficits, Economic Freedom, and Economic Growth in OECD Nations: P2SLS Fixed-Effects Estimates, 2003–2008," Journal of Private Enterprise, The Association of Private Enterprise Education, The Association of Private Enterprise Education, vol. 28(Spring 20), pages 75-96.
  2. Crafts, Nicholas, 2012. "Western Europe’s Growth Prospects: an Historical Perspective," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 71, Competitive Advantage in the Global Economy (CAGE).
  3. 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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