Premium
Functional components of public expenditure, fiscal consolidations, and economic activity
Author(s) -
Castro Vítor
Publication year - 2018
Publication title -
economics and politics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.822
H-Index - 45
eISSN - 1468-0343
pISSN - 0954-1985
DOI - 10.1111/ecpo.12104
Subject(s) - economics , austerity , human capital , unemployment , public expenditure , public spending , economic inequality , government spending , panel data , labour economics , investment (military) , demographic economics , inequality , macroeconomics , econometrics , economic growth , public finance , welfare , politics , political science , law , market economy , mathematical analysis , mathematics
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 least squares dummy variable estimator 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, whereas income inequality rises when social protection expenditures are cut.