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Functional components of public expenditure, fiscal consolidations and the economic activity

Author

Listed:
  • Vitor Castro

    (Faculty of Economics - University of Coimbra and NIPE)

Abstract

This paper analyses how the functional components of public expenditure and spending-driven consolidations affect the economic growth, unemployment and income inequality. A dynamic panel data LSDVC estimator is employed over a sample of 15 European Union countries during the period 1990-2012. The empirical results show that real GDP growth decreases when fiscal austerity measures are implemented, especially if they are spending-driven. Cuts in public expenditure undermine economic growth, namely if they slash spending on public order, recreation and education. Spending cuts on education, in particular, affect the investment in human capital, harming not only growth but also economic, social and human development. The unemployment rate also proved to be significantly boosted when austerity measures restrict spending on education, while income inequality rises when social protection expenditures are cut.

Suggested Citation

  • Vitor Castro, 2016. "Functional components of public expenditure, fiscal consolidations and the economic activity," NIPE Working Papers 12/2016, NIPE - Universidade do Minho.
    • Handle: RePEc:nip:nipewp:12/2016
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    Cited by:

    1. is not listed on IDEAS
    2. Marcelo Santos & Marta Simões, 2025. "Social expenditure composition, welfare models and standards of living across the OECD," International Journal of Economic Policy Studies, Springer, vol. 19(2), pages 435-458, August.
    3. Valeria Cirillo & Marcella Corsi & Carlo D’Ippoliti & Lucio Gobbi, 2024. "Asymmetric effects of macro policies on women’s and men’s incomes. An empirical investigation of the eurozone crisis in a gender perspective," Economia Politica: Journal of Analytical and Institutional Economics, Springer;Fondazione Edison, vol. 41(2), pages 327-359, July.
    4. Bação, Pedro & Duarte, Joshua & Simões, Marta, 2024. "Social expenditure composition, inequality and growth in the OECD: Labour market policies are most effective," Journal of Policy Modeling, Elsevier, vol. 46(1), pages 75-89.
    5. Vanesa Jorda & Jose M. Alonso, 2020. "What works to mitigate and reduce relative (and absolute) inequality?: A systematic review," WIDER Working Paper Series wp-2020-152, World Institute for Development Economic Research (UNU-WIDER).

    More about this item

    Keywords

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    JEL classification:

    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H50 - Public Economics - - National Government Expenditures and Related Policies - - - General
    • O47 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Empirical Studies of Economic Growth; Aggregate Productivity; Cross-Country Output Convergence

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