Procyclical government spending: Patterns of pressure and prudence in the OECD

This paper tests for differences in the cyclicality of government spending across functional categories. Evidence from 20 OECD countries suggests that procyclicality is more likely in smaller functional budgets, but capital spending is more likely to be procyclical for the larger spending categories.     

Rent-seeking distortions and fiscal procyclicality

Recent research has demonstrated that while government expenditures are countercyclical in most industrialized countries, they tend to be procyclical in developing countries. We develop a dynamic political-economy model to explain this phenomenon. In the model, public expenditures provide insurance to uninsured households, and optimal fiscal policy is countercyclical. The introduction of a political friction, in which successive governments disagree on the desired distribution of public spending, can lead to procyclical fiscal policies. Numerical simulations of the model allow us to compare quantitatively the relative role of common explanations for fiscal procyclicality. We conclude that political distortions in the fiscal process can explain fiscal procyclicality better than other common explanations, such as borrowing constraints and macroeconomic volatility.     

Terms of trade volatility,government spending cyclicality,and economic growth

This paper presents estimates of the effects that terms of trade volatility has on real gross domestic product (GDP) per capita growth. Based on 5‐year nonoverlapping panel data comprising 175 countries during 1980 to 2010, the paper finds that terms of trade volatility has significant negative effects on economic growth in countries with procyclical government spending. In countries where government spending is countercyclical, terms of trade volatility has no significant effect on growth. Conditional on the mediating role of government spending cyclicality, the GDP share of domestic credit to the private sector has no significant effect on the relationship between growth and terms of trade volatility.     

Participatory budgeting and the pattern of local government spending: Evidence from South Korea

We use a panel of Korean municipalities to examine the impact of participatory budgeting on local government expenditures. We find that participatory budgeting systematically alters the pattern of local spending. Municipalities using participatory budgeting reallocate resources toward more immediate and visible expenditures and away from long-term development expenditure. We also find evidence that participatory budgeting affects the municipal budget by a greater amount than the expenditures directly allocated through participatory budgeting. Our findings indicate that participatory budgeting leads to the reallocation of local public spending by increasing information flows between policymakers and service users.     

Asymmetric government expenditure: a comparison of advanced and developing countries

This paper studies the responsiveness of government expenditures to business cycles and introduces an index of asymmetric government expenditures using panel data for advanced and developing countries during the period 1981–2014. The empirical findings show that government expenditures tend to be procyclical in developing countries but acyclical in advanced economies. In addition, it is found that government expenditures respond in a countercyclical manner during bad times in advanced countries, but in a strongly procyclical manner during good times in developing countries. The index of asymmetric government expenditures for developing countries tends to be higher than that of the advanced countries.     

Public Investment and Economic Growth in Latin America: an Empirical Test

The paper analyzes the impact on economic growth of public investment spending and other relevant variables (such as human capital) for nine major Latin American nations over the 1983–93 period. The results suggest that both public and private investment spending contribute to economic growth. Overall central government consumption expenditures, on the other hand, are found to have a negative effect on private investment and growth. Finally, public expenditures on education and healthcare are found to have a positive and statistically significant effect on private capital formation and long–term economic growth. From a policy standpoint, the results suggest that indiscriminate cuts in public and private investment spending are likely to be counterproductive in the long run, and more importantly, scarce public expenditures should be channeled to the promotion of new human capital (via primary and secondary education) and the maintenance of existing human capital (through healthcare expenditures).     

EXPANSIONARY VERSUS CONTRACTIONARY GOVERNMENT SPENDING

This article theoretically examines the impact of different forms of government spending on national income in a financially open economy with a significant net international investment position the central bank of which sets domestic interest rates to target inflation. It shows that whether government spending is expansionary or contractionary ultimately depends on the productivity of that expenditure, a result that has major implications for the efficacy of fiscal policy deployed for either stimulus or austerity reasons. The key prediction of the model is that public consumption and unproductive public investment are procyclical, whereas only productive public investment is countercyclical. (JEL F41)     

Parties,divided government,and infrastructure expenditures: Evidence from U.S. states

This paper examines the impact of parties and divided government on infrastructure expenditures for transportation, education, and social services in U.S. states. As infrastructure expenditures are considered a bi-partisan priority, we hypothesize that divided governments expand infrastructure spending compared to governments under true Democratic or Republican control. We test this hypothesis using U.S. state-level data over the period 1970 to 2008 and find that divided governments indeed increase expenditures for these budget categories. Specifically, divided governments spend more on transportation than unified Democratic governments, and more on education and social services than unified Republican governments. The effect is most pronounced for the core infrastructure of transportation and even stronger when only looking at capital outlays instead of total expenditures.     

Strategic Interaction Among Local Governments in Japan: An Application to Cultural Expenditure

In the context of limited local government resources, cultural expenditures are often targeted for reduction. In Japan in particular, with its aging population, cultural expenditures have low priority. This paper examines whether or not local governments strategically influence each other with respect to cultural spending, using data from Japanese local governments. By estimating the reaction functions for local cultural expenditures, we find that there exists free‐rider behaviour between local cultural expenditures that produce beneficial spillover effects. We also find a larger free‐rider incentive the shorter the distance between neighbouring regions, the shorter the travel time between neighbouring regions, and the larger the neighbouring region's population. Furthermore, our results reveal that the provision of cultural services through intergovernmental strategic behaviours is more elastic with respect to the relative change of the distance or the travel time among neighbouring regions than to that of the population size among neighbouring regions.     

Government size,composition of public spending and economic growth in Brazil

The performance of the fiscal policy is largely affected by the relationship between government size, composition of public spending and economic growth. We use a theoretical framework to find optimal relations among these variables and confront them with a panel data for the Brazilian states. Private capital and government spending are substitute inputs in production as the Brazilian states require provision of public spending to fill gaps in the underdeveloped private sector. Public investment and current government expenditures are combined in fixed ratios in the overall government spending due to strong rigidity of the public budget. The optimal share of public investment is considerably lower than current expenditures, as occurs in developing countries characterized by low economic dynamism. Finally, the average tax burden from the data is below the estimated optimal level, meaning that there is space for increasing tax rate without harming economic growth for some Brazilian states.     

Fiscal policy and economic activity in South Asia

This paper analyzes whether fiscal policy in South Asia amplifies or smoothens business cycle fluctuations. It estimates several econometric models to explore the cyclicality of government spending and tax buoyancy. In South Asia, tax revenue increases less than one to one with changes in gross domestic product (GDP), but public spending increases more than proportionally. For each percentage point change in GDP growth, government expenditure changes by 1.3 percentage points. While changes in tax revenue have no significant impact on economic activity, the government spending multiplier is positive and significant: each additional US dollar (USD) of spending leads to an immediate increase in GDP of 0.2 USD and to an increase of 0.4 USD in the medium run. The impact of public spending on economic activity is entirely due to capital expenditure, which is also more procyclical. Procyclical public spending and a positive expenditure multiplier imply that fiscal policy in South Asia amplifies boom‐and‐bust cycles. These results are in line with those of other emerging markets and developing economies and robust to different model specifications and estimation strategies.     

Fiscal Illusion and Cyclical Government Expenditure: State Government Expenditure in the United States

A well‐established literature argues that fiscal illusion increases the level of government expenditure. This article focuses on the proposition that fiscal illusion also influences the cyclicality of government expenditure. Predictions are formed with reference to government reliance on high income elasticities of indirect tax revenues and on intergovernmental transfers. Predictions are tested with reference to the expenditures of 36 states in the United States from 1980 to 2000. Government expenditures are more likely to be procyclical when citizens systematically underestimate the cost of taxation.     

Optimal military spending in the US: A time series analysis

This paper extends previous work on the optimal size of government spending by including nested functional decompositions of military spending into consumption and investment. Post World War II US data are then used to estimate nested non-linear growth models using semi-parametric methods. As expected, investments in military and non-military expenditure are both found to be productive expenditures with respect to the private production. Moreover there is little evidence to suggest that current military spending is having a negative impact on economic growth in the US, while civilian consumption only tends to have only a weak impact. This does not imply that society will necessarily benefit from a reallocation of more spending to the military sector, nor that it is the best way to achieve economic growth.     

Public Expenditures on Education and Cultural Affairs in the West German States: Does Government Ideology Influence the Budget Composition?

Abstract. This paper examines whether government ideology influenced the allocation of public expenditures on education and cultural affairs in the West German states in the 1974–2006 period. I explicitly consider the allocation of policy responsibilities between the federal and the states' governments. The results suggest that leftist governments slightly increased public spending for schooling, whereas rightwing governments spent somewhat more on universities and cultural affairs. This spending pattern appears to be in line with the preferences of the governing parties' constituencies and indicates political competition in a time of declining electoral cohesion.     

GOVERNMENT CONSUMPTION AND THE COMPOSITION OF PRIVATE EXPENDITURE: A CONDITIONAL ERROR CORRECTION MODEL

In this paper we provide empirical evidence of the relationship between government purchases and private expenditure by adopting a microeconomic approach. Using UK quarterly data, a long‐run demand system conditioned to the public sector is obtained by specifying a vector error correction model in which government consumption is assumed as an exogenous I(1) forcing variable. Our findings reject the hypothesis of separability of individual preferences between public and private expenditures, with simultaneous crowding‐out/in effects. Moreover, crowding‐out effects of government consumption on private spending are found to be larger for those goods and services that produce similar utility.     

Democracy comes to Europe: Franchise extension and fiscal outcomes 1830-1938

This paper examines the relation between public spending and the spread of democracy in Western Europe during the period 1830-1938. Our data set includes measures of the size of the electorate, the election rule, and electoral participation, as well as measures of the size and composition of central government expenditures for 12 countries. We estimate panel regressions, and find that (1) the gradual lifting of socio-economic restrictions on the voting franchise contributed to growth in government spending mainly by increasing spending on infrastructure and internal security; (2) the female suffrage had a weak positive effect, through spending on health, education and welfare; (3) the change from majority to proportional rule, which took place in 10 of the countries, did not contribute to growth in government spending, and held back spending on health, education and welfare; (4) there exists (weak) complementarity between economic development and the spread of democracy.     

School Finance Litigation, Tax and Expenditure Limitations, and Education Spending

Since the early 1970s, litigation in many U.S. states has led to education finance reform. Over the same period, many states have imposed new tax and expenditure limitations (TELs) on local governments. The imposition of a TEL may alter how local and state education expenditures change subsequent to court-mandated decreases in spending inequality. Similarly, the effectiveness of TELs in limiting local education expenditures may be influenced by reform. To better evaluate the effects of reform and TELs on education spending, this article considers them jointly and finds that reform has a negative effect on local own-source education expenditures only in the presence of TELs. In the absence of court-ordered reform, TELs decrease own-source expenditure, but the effect is less pronounced than when TELs are present with reform. When both are present, state government spending on education is higher. Also TELs and court-ordered reform independently increase state government spending on education. (JEL H72 , I22 )     

COMPULSORY VOTING AND GOVERNMENT SPENDING

Crain and Leonard (1993) examine the effects of compulsory voting on the scale of government spending. The purpose of this comment is twofold. First, problems in the Grain and Leonard's approach are identified. The choice of government consumption, rather than expenditure, as representative of government spending is inappropriate and the classification of non-voters as net beneficiaries of government spending is questionable. Second, the composition of government expenditure is examined. Cross-country data tentatively suggests that voters benefit, relative to non-voters, from government expenditures on defence and economic services while non-voters benefit from government expenditure on health.     

Budgets,expenditure composition and political manipulation

Abstract

This paper analyses the presence of political cycles in Portuguese Governments’ expenditures using monthly data over the period 1991–2013 for the main categories of government expenditures. The results indicate that Portuguese Governments act opportunistically regarding the budget surplus and that they favour capital instead of current spending near to the elections. Moreover, right-wing governments are more prone to reduce expenditures and deficits after the elections than left-wing ones. A deeper disaggregated analysis of the components of government expenditures corroborates these findings while disentangling other relevant patterns of political manipulation in Portugal.     

基于RIMS Ⅱ的国防支出区域经济效应分析——以美国圣迭戈县为例

国防支出对区域经济影响的主要分析工具之一是投入产出分析技术。本文在RIMS Ⅱ(Regional Input-Output Mod-eling System,区域投入产出模型化系统)基础上,讨论了区域投入产出分析的主要乘数模型:产出乘数、就业乘数和收入乘数。将乘数模型应用于国防支出的区域经济效应研究,我们发现,国防支出通过驻地军事基地和装备采购支出对区域经济发展的影响是显著的。由于国防支出由中央政府支付,经济区域内国防支出的流入意味着为区域经济注入了必要的生产发展资金,推动经济区域内循环往复的生产、消费、税收和就业。同时,不同类型的国防支出流入在区域经济内发挥的经济效应是不同的。以生产武器装备,承接国防合同为主而流入大量国防采购资金、国防R&D资金的地区,显然要比经济区内单纯驻有军事基地的地区有更高的乘数效应,国防支出对区域经济的产出、收入和就业的经济效应更为明显。