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Spending Dynamics in Euro Area Countries: Composition and Determinants

Sebastian Hauptmeier, Antonio Jesus Sanchez Fuentes () and Ludger Schuknecht ()

Hacienda Pública Española / Review of Public Economics, 2015, vol. 215, issue 4, 119-138

Abstract: This study analyses the composition and main determinants of spending dynamics in selected euro area countries between 1999 and 2013. To assess the stance of public spending policies we use the indicators developed in Hauptmeier et al. (2011). Our results indicate that the overall expansionary expenditure stance in 1999-2009 was mainly driven by public consumption. Transfers and subsidies on the other hand were mostly expansionary after 2008 while public investment had boomed just before the crisis and turned restrictive during the crisis. The overall policy stance turned restrictive in 2010 and strongly so in Greece, Ireland, Portugal and Spain. Most consolidation efforts focussed on public investment and on public consumption and while transfers and subsidies were largely spared. Our econometric analysis, which covers the 2000-2013 period, shows a significantly pro-cyclical stance of public consumption which was driving overall spending dynamics. The degree of spending expansion tends to be negatively affected by the size of government debt and the presence of effective fiscal rules. On the other hand, EMU-related interest savings coincided with an expansionary expenditure stance. Revenue windfalls and shortfalls exerted a significant effect on government investment spending.

Keywords: Expenditure policies; public debt; expenditure rules; sustainability; fiscal stance (search for similar items in EconPapers)
JEL-codes: E17 E61 E65 H50 H60 (search for similar items in EconPapers)
Date: 2015
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