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Government Spending Adjustment: The OECD Since the 1990s

Author

Listed:
  • Zvi Hercowitz

    (Tel Aviv University, Bank of Israel)

  • Michel Strawczynski

    (Bank of Israel)

Abstract

This paper investigates the drastic reduction in public spending in OECD countries during the 1990s. Using a panel data set of 18 countries, we find this adjustment to be a general OECD development, beginning in 1994, and that participation in the Maastricht Treaty or in the Stability and Growth Pact does not introduce additional effects. In the long run, this adjustment is estimated to reduce the ratio of primary government spending to output by about 4 percentage points. There is no evidence of differential adjustment in expansions or recessions. We also find that declines in interest payments on public debt are followed by increases in primary expenditures by about the same amount. The econometric framework makes it possible to compute the long-run ratios of government expenditures to GDP in the 18 OECD countries in the sample.

Suggested Citation

  • Zvi Hercowitz & Michel Strawczynski, 2005. "Government Spending Adjustment: The OECD Since the 1990s," Bank of Israel Working Papers 2005.09, Bank of Israel.
    • Handle: RePEc:boi:wpaper:2005.09
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    References listed on IDEAS

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    1. Buti, M. & Eijffinger, S.C.W. & Franco, D., 2003. "Revisiting the Stability and Growth Pact : Grand Design or Internal Adjustment?," Other publications TiSEM 2e5a01d9-9a1f-492d-995f-a, Tilburg University, School of Economics and Management.
    2. Zvi Hercowitz & Michel Strawczynski, 2004. "Cyclical Ratcheting in Government Spending: Evidence from the OECD," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 353-361, February.
    3. Galí, Jordi & Perotti, Roberto, 2003. "Fiscal Policy and Monetary Integration in Europe," CEPR Discussion Papers 3933, C.E.P.R. Discussion Papers.
    4. Buti, Marco, 2003. "Revisiting the stability and growth pact: grand design or internal adjustment?," Sede de la CEPAL en Santiago (Estudios e Investigaciones) 34908, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL).
    5. Mr. Peter S. Heller & Mr. David Hauner, 2005. "Characterizing the Expenditure Uncertainties of Industrial Countries in the 21st Century," IMF Working Papers 2005/091, International Monetary Fund.
    6. Jordi Galí & Roberto Perotti, 2003. "Fiscal policy and monetary integration in Europe [‘Consumption smoothing through fiscal policy in OECD and EU countries’]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 18(37), pages 533-572.
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