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The Cyclical Behaviour of Government Spending for Social Protection: Is the OECD Methodology Robust?

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Abstract

Spending elasticities measure the reaction of different government spending components to the business cycle. They are important inputs for fiscal forecasts, and they are particularly relevant in the context of European Union (EU) fiscal rules, as elasticity estimates enter the estimation of fiscal space. This paper analyses the sensitivity of the estimation method used by the Organisation for Economic Co-operation and Development (OECD) and the European Commission to obtain government spending elasticities by focusing on 11 EU countries in the 1995-2020 period. Our results suggest that spending elasticities are sensitive to small variations in data and model specification. For most EU countries, we reject the assumption that only unemployment spending responds to cyclical variations. While unemployment spending is indeed a major driver of counter-cyclical social spending, other categories of social spending also show signs of responding to the business cycle.

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  • Aleksandr Arsenev & Philipp Heimberger & Bernhard Schütz, 2023. "The Cyclical Behaviour of Government Spending for Social Protection: Is the OECD Methodology Robust?," wiiw Working Papers 238, The Vienna Institute for International Economic Studies, wiiw.
    • Handle: RePEc:wii:wpaper:238
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    1. Achim Truger, 2015. "The Fiscal Compact, Cyclical Adjustment and the Remaining Leeway for Expansionary Fiscal Policies in the Euro Area," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(2), pages 157-175, June.
    2. Heimberger, Philipp, 2023. "The cyclical behaviour of fiscal policy: A meta-analysis," Economic Modelling, Elsevier, vol. 123(C).
    3. Ethan Ilzetzki & Carlos A. Vegh, 2008. "Procyclical Fiscal Policy in Developing Countries: Truth or Fiction?," NBER Working Papers 14191, National Bureau of Economic Research, Inc.
    4. Heimberger, Philipp, 2023. "This time truly is different: The cyclical behaviour of fiscal policy during the Covid-19 crisis," Journal of Macroeconomics, Elsevier, vol. 76(C).
    5. Joseph Mawejje & Nicholas M. Odhiambo, 2022. "The determinants and cyclicality of fiscal policy: Empirical evidence from East Africa," International Economics, CEPII research center, issue 169, pages 50-70.
    6. Jalles, João Tovar, 2021. "Dynamics of government spending cyclicality," Economic Modelling, Elsevier, vol. 97(C), pages 411-427.
    7. Robert Price & Thai-Thanh Dang & Yvan Guillemette, 2014. "New Tax and Expenditure Elasticity Estimates for EU Budget Surveillance," OECD Economics Department Working Papers 1174, OECD Publishing.
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    1. Aleksandr Arsenev & Philipp Heimberger & Bernhard Schütz, 2024. "Das konjunkturelle Verhalten der Staatsausgaben für Gesundheit und Soziales in Österreich und Deutschland: Wie robust ist die OECD-Methodik?," wiiw Research Reports in German language 25, The Vienna Institute for International Economic Studies, wiiw.

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    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H62 - Public Economics - - National Budget, Deficit, and Debt - - - Deficit; Surplus
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles

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