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Spending Dynamics in Euro Area Countries: Composition and Determinants

Author

Listed:
  • Sebastian Hauptmeier

    () (European Central Bank)

  • A. Jesús Sánchez Fuentes

    () (Universidad Complutense de Madrid &Jen)

  • Ludger Schuknecht

    () (German Ministry of Finance)

Abstract

This study analyses the composition and main determinants of spending dynamics in selected euro area countries between 1999 and 2013. To assess the stance of public spending policies we use the indicators developed in Hauptmeier et al. (2011). Our results indicate that the overall expansionary expenditure stance in 1999-2009 was mainly driven by public consumption. Transfers and subsidies on the other hand were mostly expansionary after 2008 while public investment had boomed just before the crisis and turned restrictive during the crisis. The overall policy stance turned restrictive in 2010 and strongly so in Greece, Ireland, Portugal and Spain. Most consolidation efforts focussed on public investment and on public consumption and while transfers and subsidies were largely spared. Our econometric analysis, which covers the 2000-2013 period, shows a significantly pro-cyclical stance of public consumption which was driving overall spending dynamics. The degree of spending expansion tends to be negatively affected by the size of government debt and the presence of effective fiscal rules. On the other hand, EMU-related interest savings coincided with an expansionary expenditure stance. Revenue windfalls and shortfalls exerted a significant effect on government investment spending.

Suggested Citation

  • Sebastian Hauptmeier & A. Jesús Sánchez Fuentes & Ludger Schuknecht, 2015. "Spending Dynamics in Euro Area Countries: Composition and Determinants," Hacienda Pública Española, IEF, vol. 215(4), pages 119-138, December.
  • Handle: RePEc:hpe:journl:y:2015:v:215:i:4:p:119-138
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    References listed on IDEAS

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    1. Alberto Alesina & Filipe R. Campante & Guido Tabellini, 2008. "Why is Fiscal Policy Often Procyclical?," Journal of the European Economic Association, MIT Press, vol. 6(5), pages 1006-1036, September.
    2. Bruck, Tilman & Zwiener, Rudolf, 2006. "Fiscal policy rules for stabilisation and growth: A simulation analysis of deficit and expenditure targets in a monetary union," Journal of Policy Modeling, Elsevier, vol. 28(4), pages 357-369, May.
    3. Peter Wierts, 2008. "How do Expenditure Rules affect Fiscal Behaviour?," DNB Working Papers 166, Netherlands Central Bank, Research Department.
    4. Galí, Jordi & Perotti, Roberto, 2003. "Fiscal Policy and Monetary Integration in Europe," CEPR Discussion Papers 3933, C.E.P.R. Discussion Papers.
    5. van Riet, Ad, 2010. "Euro area fiscal policies and the crisis," Occasional Paper Series 109, European Central Bank.
    6. Ana Lamo & Javier J. Pérez & Ludger Schuknecht, 2013. "The cyclicality of consumption, wages and employment of the public sector in the euro area," Applied Economics, Taylor & Francis Journals, vol. 45(12), pages 1551-1569, April.
    7. Ilzetzki, Ethan & Mendoza, Enrique G. & Végh, Carlos A., 2013. "How big (small?) are fiscal multipliers?," Journal of Monetary Economics, Elsevier, vol. 60(2), pages 239-254.
    8. Antonio Fatás & Ilian Mihov, 2003. "The Case for Restricting Fiscal Policy Discretion," The Quarterly Journal of Economics, Oxford University Press, vol. 118(4), pages 1419-1447.
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    11. Holm-Hadulla, Fédéric & Hauptmeier, Sebastian & Rother, Philipp, 2010. "The impact of numerical expenditure rules on budgetary discipline over the cycle," Working Paper Series 1169, European Central Bank.
    12. repec:hrv:faseco:34729976 is not listed on IDEAS
    13. Hauptmeier, Sebastian & Sanchez-Fuentes, A. Jesus & Schuknecht, Ludger, 2011. "Towards expenditure rules and fiscal sanity in the euro area," Journal of Policy Modeling, Elsevier, vol. 33(4), pages 597-617, July.
    14. Xavier Debrun & Laurent Moulin & Alessandro Turrini & Joaquim Ayuso-i-Casals & Manmohan S. Kumar, 2008. "Tied to the mast? National fiscal rules in the European Union," Economic Policy, CEPR;CES;MSH, vol. 23, pages 297-362, April.
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    16. Trachanas, Emmanouil & Katrakilidis, Constantinos, 2013. "Fiscal deficits under financial pressure and insolvency: Evidence for Italy, Greece and Spain," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 730-749.
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    Cited by:

    1. Andrea Rieck & Ludger Schuknecht, 2017. "Preserving Government Solvency: A Global Policy Perspective," ifo DICE Report, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 14(4), pages 71-81, 02.
    2. repec:ces:ifodic:v:14:y:2017:i:4:p:19267794 is not listed on IDEAS

    More about this item

    Keywords

    Expenditure policies; public debt; expenditure rules; sustainability; fiscal stance;

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • H60 - Public Economics - - National Budget, Deficit, and Debt - - - General

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