Development and the cyclicality of government spending in the Czech Republic

This paper aims to provide direct empirical evidence on business cycle relations between GDP and government spending in the Czech Republic. Government spending plays an important role in a fiscal policy as a possible automatic stabilizer. We analyzed annual data on government spending in compliance with the COFOG international standard. We use cross-correlation on cyclically filtered adjusted time series over the period 1995-2008. The cyclical properties of GDP and government spending function were, in average, found as weakly correlated. However, we report considerable differences in correlations across the spending functions. The lowest correlation coefficient (0.01) was found for General public services (G10) and the high-est average was reported for economic affairs (-0.58). As regards to using government spending as the stabilizer, total government spending, general public services, defense, economic affairs and education spending were negative correlated and it confirms countercyclical relation between these spending functions and GDP. It is in line with theory suggestion. On the other hand, the highest spending function (social protection) correlated moderate positive and it means procyclical development. The results of Johansen cointegration test proved the existence of long-run relationship between GDP and total government spending, public order and safety and economic affairs.