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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.
This paper analyses the impact of fiscal consolidations on the functional components and sub-components of public expenditures using data for 15 EU countries over the period 1990–2012. The empirical analysis shows that government spending slows down during periods of fiscal consolidations. But, more importantly, our results unveil that the components in which those decreases are more significant are defence, public order, environment, housing, health, education and social protection, especially if they are spending-driven and the higher their size is. This evidence is even stronger in a particular group of countries, known in the literature as PIIGS. Nevertheless, spending in public services has consistently proved to increase during fiscal consolidations. Digging deeper in the data, we find that the cause for that increase is the public debt transactions: when we look at the expenditures lodged inside this item, we realise that the boost in this item can be due to the likely rise in interest payments and outlays for underwriting and floating government loans. As countries also intend to reduce public debt during fiscal consolidations, they can use the cuts in the other components to finance the reduction of public debt (via the increase in public debt transactions), which ends up increasing spending in the public services component.