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

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  • Ismael Sanz

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

Abstract

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.

Suggested Citation

  • Ismael Sanz, 2011. "What Do OECD Countries Cut First When Faced with Fiscal Adjustments?," Southern Economic Journal, Southern Economic Association, vol. 77(3), pages 753-775, January.
  • Handle: RePEc:sej:ancoec:v:77:3:y:2011:p:753-775
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    File URL: http://dx.doi.org/10.4284/sej.2011.77.3.753
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    Cited by:

    1. Castro, Vítor, 2017. "The impact of fiscal consolidations on the functional components of government expenditures," Economic Modelling, Elsevier, vol. 60(C), pages 138-150.
    2. Robert A Buckle & Amy A Cruickshank, 2013. "The Requirements for Long-Run Fiscal Sustainability," Treasury Working Paper Series 13/20, New Zealand Treasury.
    3. Norman Gemmell & Richard Kneller & Ismael Sanz, 2016. "Does the Composition of Government Expenditure Matter for Long-Run GDP Levels?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(4), pages 522-547, August.
    4. 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, vol. 28(Spring 20), pages 75-96.
    5. Vitor Castro, 2016. "On the behaviour of the functional components ofgovernment expenditures during fiscal consolidations," NIPE Working Papers 11/2016, NIPE - Universidade do Minho.
    6. Crafts, Nicholas, 2012. "Western Europe's Growth Prospects: an Historical Perspective," CEPR Discussion Papers 8827, C.E.P.R. Discussion Papers.

    More about this item

    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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