The impact of fiscal consolidations on the functional components of government expenditures

Abstract

This paper analyses how the functional components and sub-components of government expenditures are affected by fiscal consolidations. A fixed-effects estimator is employed over a panel of 15 European Union countries during the period 1990–2012. The results show that spending on public services increases during fiscal consolidations, while spending on defence, public order, health, education and social protection is significantly cut. A more disaggregated analysis proves that fiscal consolidations are harmful for important social expenditures, in particular, for those related to citizens’ safety, health assistance, social protection and investment in human capital. This evidence is even stronger in a particular group of countries, known in the literature as PIIGS. Hence, fiscal consolidations can have important implications on the living standards of the more economically vulnerable citizens.