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Public Choice

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19.05.2020

Public expenditures and the risk of social dominance

verfasst von: Ludger Schuknecht, Holger Zemanek

Erschienen in: Public Choice | Ausgabe 1-2/2021

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Abstract

Based on the observation of an unabated trend towards higher social spending-to-GDP ratios in advanced countries, the study analyzes the risk of social dominance, a situation in which social expenditures dominate fiscal policy and undermine economic growth and fiscal sustainability. We examine that risk by analyzing drivers of social expenditures and their interactions with other fiscal variables. The results show that social expenditure growth largely is population ageing driven and crowds out other primary expenditures; we also find evidence of fiscal unsustainability. The findings, along with the accelerating ageing of populations and exceptionally high political costs of reforming social expenditures suggest significant and rising risks of social dominance.

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We constructed a dataset that allows a comparative analysis of expenditure developments and other relevant fiscal variables over time and across countries. All fiscal data refer to the general government budgets of 21 advanced economies from 1960 to 1980 through 2016 (see the data “Appendix”). While we occasionally refer to the full 55-year sample, the analysis focuses on the post-1980 period.

The rise in expenditure ratios coinciding with rising per-capita GDP often is referred to as “Wagner’s law” (Wagner 1883). Explanations might be that social expenditures are income-superior goods, rising economic and social complexity increase the demands for public intervention (Legrenzi and Milas 2002) or political economy arguments related to the voting power of public sector employees, special interests or both (Buchanan and Tullock 1962 and many others).

We use GDP per capita in logged values and its change is the difference in logged values.

For example, education achievement hardly is correlated with public spending across advanced countries, in part because the efficiency of public education expenditures differs significantly across countries. Therefore, enhancing expenditure efficiency may be a better strategy than merely spending more in many cases (Afonso et al. 2005). However, that recommendation may not always be sound because public infrastructure spending may finance “white elephants”: additional education spending does not guarantee good educations and core administrative expenditures may reflect bloated bureaucracies. Therefore, the interpretation of the findings needs to be very cautious.

Core public administration without spending on economic affairs (mainly subsidies).

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Titel: Public expenditures and the risk of social dominance
verfasst von: Ludger Schuknecht
Holger Zemanek
Publikationsdatum: 19.05.2020
Verlag: Springer US
Erschienen in: Public Choice / Ausgabe 1-2/2021
Print ISSN: 0048-5829
Elektronische ISSN: 1573-7101
DOI: https://doi.org/10.1007/s11127-020-00814-5

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