Does government spending efficiency improve fiscal sustainability?

Antonio Afonso and José Alves

No 2022/0226, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: We evaluate the impact of government spending efficiency on fiscal sustainability for a panel of 35 OECD countries during the period of 2007-2020. To answer our research question we first compute the magnitude of the responses of government revenues to changes in government spending. Next, we make use of so-called government spending efficiency scores, which efficiently indicate how governments can maintain their level of performance whilst using fewer inputs. Our results show that for the input efficiency scores obtained, countries’ fiscal balance and fiscal sustainability is directly improved by the use of less public resources, whilst maintaining the same level of output. In the cases of the output efficiency scores, the commitment of increased government outputs can lead to higher economic growth and the generation of additional government revenues, which also improves fiscal sustainability. Specifically, rationalising public expenditures without jeopardising the actual level of public goods and provision of services is a stronger determinant of fiscal sustainability, as well as for the improvement of the primary budget balance.

Keywords: fiscal sustainability; spending efficiency; panel data. (search for similar items in EconPapers)
JEL-codes: C23 E21 E62 H5 H62 (search for similar items in EconPapers)
Date: 2022-04
New Economics Papers: this item is included in nep-eec, nep-eff and nep-mac
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Related works:
Working Paper: Does Government Spending Efficiency Improve Fiscal Sustainability? (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:ise:remwps:wp02262022

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