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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. Introduction. Alesina and Giavazzi call for reform in many sectors in Europe

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comprehensive expenditure reform little pain much gain

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.

slide2
Introduction
  • Alesina and Giavazzi call for reform in many sectors in Europe
  • I zoom in on public expenditure reform in potential “role models”
  • Confirm A&G
  • Much to gain, little pain!
slide3
Greece (2000)

52.0

Luxembourg (1981)

51.9

UK (1981)

50.7

Germany (1996)

50.2

Non-euro OECD 49.7

Spain (1993)

47.6

Portugal (2004)

46.5

Japan (1998)

41.0

Australia (1985)

40.2

United States (1992)

37.2

Switzerland (1998)

34.8

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

Sweden

57.1

Total expenditure, general government, % of GDP

Maximum versus recent data

Italy (1993)

57.7

57.4

Austria (1993)

Denmark

55.1

56.5

New Zealand (1985)

France

54.0

Ireland (1982)

56.2

Finland

51.5

France (1996)

55.4

Austria

50.4

Euro zone 55.1

Belgium

50.2

Canada (1992)

52.6

49.9

Greece

48.6

Italy

Germany

47.5

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 today’s Asian NICs

ICs (1913) 12.7

Source: ECB and Tanzi and Schuknecht, 2000.

expenditure reduction in countries with ambitious reforms maximum today
Expenditure reduction in countries with ambitious reforms (maximum – today)

Ambitious reformer = primary expenditure reduction by >5% of GDP within 7 years after maximum.

Borderline: Austria, New Zealand, Luxembourg

Source: Hauptmeier, Heipertz and Schuknecht (2006)

comprehensive reform agendas in all cases
Comprehensive reform agendas in all cases…

1/ Decline in primary expenditure.

Source: Hauptmeier, Heipertz and Schuknecht (2006)

slide7
4

3

Trend GDP growth (%)

2

1

T0

T1

T2

T3

T4

T5

T6

T7

Ambitious reformers

Timid reformers

Trend growth improving…

slide9
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

Ireland

Belgium

Mean score PISA science scale, 2003

500

Germany

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

gini coefficient and social spending
6.0

Finland

5.0

Italy

4.0

UK

Japan

3.0

Sweden

US

2.0

Luxembourg

Germany

Netherlands

Austria

1.0

Greece

0.0

France

-1.0

Denmark

-2.0

Ireland

-3.0

-4.0

2

= 0.2079

y = 0.2462x + 1.6646

y = -0.0052x + 0.4129

2

R

= 0.3255

R

Social spending reform may hurt income distribution little…

Gini coefficient and social spending

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

0.22

Denmark

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

slide11
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

conclusion
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!
bibliography
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.
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