Comprehensive Expenditure Reform Little Pain Much Gain

1
Comprehensive Expenditure Reform - Little Pain
Much Gain?

• by Ludger Schuknecht

ECB. The views expressed in this paper do not
necessarily reflect those of the European Central
Bank.
2
Introduction

• Alesina and Giavazzi call for reform in many
  sectors in Europe
• I zoom in on public expenditure reform in
  potential role models
• Confirm AG
• Much to gain, little pain!

3
Maximum public spending ratio (year)
Big Government Retreating?
Sweden (1993)
73.0
Finland (1993)
64.8
Belgium (1983)
63.8
Recent public spending ratio, 2004 or most recent
Denmark (1993)
61.3
Netherlands (1983)
58.3
57.1
Sweden
Italy (1993)
57.7
57.4
Austria (1993)
55.1
Denmark
New Zealand (1985)
56.5
France
54.0
Ireland (1982)
56.2
Finland
51.5
France (1996)
55.4
50.4
Austria
Euro zone 55.1
50.2
Belgium
Canada (1992)
52.6
49.9
Greece
48.6
Italy
47.5
Germany
Euro zone 47.0
Netherlands
47.1
Portugal
46.5
Luxembourg
45.6
UK
44.1
Non-euro OECD 42.0
Canada
39.7
Spain
39.0
Japan/New Zealand
38.6
Australia
36.3
United States/Switzerland
34.3
Ireland
34.0
ICs (1960) 27.9, similar to todays Asian NICs
ICs (1913) 12.7

• Total expenditure, general government, of GDP
• Maximum versus recent data

Source ECB and Tanzi and Schuknecht, 2000.
4
Expenditure reduction in countries with ambitious
reforms (maximum today)
Ambitious reformer primary expenditure
reduction by gt5 of GDP within 7 years after
maximum. Borderline Austria, New Zealand,
Luxembourg
Source Hauptmeier, Heipertz and Schuknecht
(2006)
5
Comprehensive reform agendas in all cases
1/ Decline in primary expenditure.
Source Hauptmeier, Heipertz and Schuknecht
(2006)
6
Fiscal performance improving

7
Trend growth improving

8
Ranking of per capita gross national income, PPP
adjusted (2004) and its change 1980-2004
9
Spending must be efficient, not necessarily high
Public education spending and PISA reading scale
550
Finland
Japan

540
UK
530
Netherlands
520
France
Sweden
510
Belgium
Ireland
Mean score PISA science scale, 2003
Germany
500
US
Spain
Austria
490
Italy
480
Greece
Luxembourg
Denmark
470
Portugal
460
3
3.5
4
4.5
5
5.5
6
6.5
7
y -2.0383x 513.13
Public spending on education in of GDP, 2002
2
R
0.0076
Source OECD
10
Gini coefficient and social spending
Social spending reform may hurt income
distribution little
0.4

0.38
Portugal
0.36
Italy
United States
Greece
0.34
Spain
United Kingdom
0.32
Gini coefficient, about 2000
Japan
Change in the Gini coefficient, mid 1980s-2000
0.3
Ireland
Germany
0.28
France
Finland
0.26
Netherlands
Luxembourg
Austria
0.24
Sweden
Denmark
0.22
0.2
12
14
16
18
20
22
24
26
28
30
-10
-5
0
5
10
Public social spending, about 2000
Change in social spending, mid 1980s-2000
Source OECD
11
Economic freedom improves
Expenditure reform and economic freedom
2.5
2.0
1.5
Change freedom indicator, post reform
1.0
0.5
0.0
-20.0
-15.0
-10.0
-5.0
0.0
-0.5
y -0.0793x - 0.056
Change expenditure ratio, post reform
R
2
0.3453
Economic freedom as defined by Fraser Institute
excluding public finance elements
12
Conclusion

• Reform experiences confirm messages in Alesina
  Giavazzi (and their earlier work)
• Ambitious expenditure reform as part of
  comprehensive packages coincide with experiences
  of
• an improved fiscal, institutional and growth
  outlook
• at little cost (if any) to social indicators
• Reforms strengthen incentives/opportunities!

13
Bibliography

• Expenditure Reform in Industrialised Countries A
  Case Study Approach (with S. Hauptmeier and M.
  Heipertz), ECB Working Paper No 634, May 2006.
• Reforming Public Expenditure in Industrialised
  Countries Are There Trade-Offs (with V. Tanzi),
  ECB Working Paper 435, published in Politeia
  (London) and in P. Wierts, S. Deroose, E. Flores
  and A. Turrini (eds.) Fiscal Policy Surveillance
  in Europe, Palgrave, (April 2006).
• Public Spending in the 20th Century A Global
  Perspective (with Vito Tanzi), Cambridge
  University Press, 2000.