The deterioration of the public spending mix during the global financial crisis: Insights from new indicators

New indicators measuring the effects of public spending on inclusive growth have been constructed using recent empirical work by Fournier and Johansson (2016) and a recent public finance dataset (Bloch et al., 2016). A first set of indicators combines information on the mix of public spending. Each spending item share is multiplied with an estimated coefficient from growth and inequality equations to build both a growth and an income distribution component, which is then summed up to an aggregate inclusive growth indicator. The spending mix analysis cannot, however, measure the effectiveness of public spending within individual spending items, which is difficult to observe in a comparable manner across countries. A second set of indicators attempts to at least partly overcome this limitation by including information on the size and perceived effectiveness of governments. The average of the spending mix indicator and the size and effectiveness indicator provides an indicative overall indicator on the effects of public spending on inclusive growth. The analysis suggests that countries with a counter-cyclical fiscal stance typically have a public spending structure that is more supportive of inclusive growth. There is also a striking link between the growth component of the public spending mix indicator and the output gap: the capacity of the public finances to support inclusive growth deteriorated markedly in the countries hardest hit during the recent crisis.