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What Do OECD Countries Cut First When Faced with Fiscal Adjustments?
Author(s) -
Sanz Ismael
Publication year - 2011
Publication title -
southern economic journal
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.762
H-Index - 58
eISSN - 2325-8012
pISSN - 0038-4038
DOI - 10.4284/sej.2011.77.3.753
Subject(s) - consolidation (business) , economics , government spending , government expenditure , government (linguistics) , public expenditure , fiscal policy , economic policy , public economics , monetary economics , macroeconomics , public finance , finance , welfare , market economy , linguistics , philosophy
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‐growth‐enhancing expenditure.