Finansudvalget 2016-17
FIU Alm.del Bilag 117
Offentligt
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The long-term effect of the size
and the mix of public spending
on growth and inequality
Copenhagen, May 24, 2017
http://www.oecd.org/eco/the-effect-of-the-size-and-mix-of-public-spending-on-
growth-and-inequality.htm
ECOSCOPE blog:
oecdecoscope.wordpress.com
 FIU, Alm.del - 2016-17 - Bilag 117: Præsentationer fremlagt på Finansudvalget ekspertmøde om dynamiske effekter onsdag den 24. maj 2017
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Key messages
Changes of public spending size, mix and effectiveness can have large
effects on growth and inequality
• Improving student performance yields large gains for all by raising skills.
• Higher public investment is associated with large growth gains and lifts “all boats” as it
raises average incomes without any adverse equity effects.
• Reducing the share of pension spending and of subsidies boosts growth. Lower pension
spending has no adverse effects on disposable income inequality, but lower subsidies
increase inequality.
• Spending more on family and child care benefits reduces inequality as they benefit
lower-income families more.
• Room for improvement is limited in Denmark.
Country-specific characteristics matter
• The design of education policy matters more than education spending.
• The growth gains from higher investment decline at a high level of the public capital
stock, though virtually all countries have room for additional spending.
• The effect of government size depends on government effectiveness.
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1. Motivation and approach
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Changes to the spending and tax mix have
gone in the wrong direction between
2007 and 2013
Change in education and public investment share
4
Higher productive spending and
lower distortionary taxes
2
SWE
HUN
-2
SVN
CZE
ISR
DEU
BEL
DNK
CHE
0
POL LUX
GBR AUT SVK
NOR FRA
FIN
NLD
USA
GRC
ITA
JPN
KOR
EST
ISL
PRT
-4
-6
ESP
-8
IRL
-10
-10
-8
-6
-4
-2
0
2
4
6
8
Change in share of personal income tax, social security contributions and corporate income tax
Lower productive spending and
higher distortionary taxes
Source: OECD Public Finance Dataset, forthcoming.
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Design of public spending, growth and
inequality: the approach
Key issue: Raising long-term growth while addressing inequality
Empirical setup:
•
Growth:
Neoclassical convergence model
•
Inequality:
Estimation of the impact of the mix of spending along the
distribution of household income
• The overall effect of public finance on the distribution of disposable income is
the sum of the direct effect on disposable income and the indirect growth
effect.
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2. Growth and inequality
effects can be large.
3. Room for improvement is
limited in Denmark
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Illustrative long-term growth effects
of an increase in the education level
Per cent
30
Quantity of education (years of schooling)
Quality of education (PISA)
25
20
15
10
5
0
Note: In countries where the mean PISA score or average years of schooling are below the
average level of countries in the top half of the sample, educational attainment is assumed to
gradually converge to this level. The figure reports the effect after 45 years of a reform phased in
over 45 years.
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Illustrative long-term GDP gains
from increasing public investment
Per cent
30
Public investment
25
20
15
10
5
0
Note: In countries where public investment to potential GDP is below the average ratio of
countries in the top half of the sample, public investment will converge to this average ratio. The
figure reports the effect after 45 years of a reform phased in over 10 years.
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Illustrative long-term GDP gains from
decreasing pension spending
Per cent
30
Old age and survivors pensions
25
20
15
10
5
0
Note: In countries where spending to the potential GDP ratio on pensions is above the average
level of countries in the bottom half of the sample, spending will gradually decline to this level.
The figure reports the effect after 45 years of a reform phased in over 10 years.
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Illustrative gains from decreasing
public subsidies
Per cent
40
Average effects
30
20
10
0
-10
Effects on the poor
Effects on the rich
Note: In countries where subsidies to potential GDP are above the average ratio of that of
countries in the bottom half of the sample, subsidies will gradually decline to this ratio.
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Illustrative gains from raising family and
child benefits on disposable income
Per cent
40
Average effects
30
20
10
0
-10
Effects on the poor
Effects on the rich
Note: In countries where family benefits to potential GDP is below the average ratio of that of
countries in the top half of the sample, family benefits will gradually converge to this average
ratio.
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2. d
3. Country-specific
characteristics matter
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In advanced economies, the link between education
spending and student performance is weak
600
Germany
Australia
Singapore
550
Science performance (score points)
Chinese Taipei
Japan
Estonia Canada
500
Korea
New Zealand
Poland Portugal
Ireland
Spain France
Russia
LatviaCzech Rep.
Italy
Lithuania
Croatia
Hungary
Israel
Belgium
Bulgaria
Uruguay
Thailand
Colombia
Chile
Slovak Rep.
Finland
Netherlands
Netherland
Denmark
United Kingdom
Austria
Norway
Sweden
United States
Iceland
Malta
R² = 0,04
Switzerland
Luxembourg
450
400
Georgia
Turkey
Mexico
Montenegro
Peru
Brazil
Costa Rica
R² = 0,36
350
Dominican Republic
300
0
20
40
60
80
100
120
140
160
180
200
Average spending per student from the age of 6 to 15 (in thousands USD, PPP)
The analysis provides no evidence of the growth effect of education spending.
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Government size and effectiveness
The adverse effect of government size on potential GDP decreases with
government effectiveness
GDP gain of one spending point increase of public spending, in per cent
10
5
0
-5
-10
Finland,
Sweden,
Denmark,
Norway
-15
-20
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2.2
Perception of government effectiveness
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Government size and effectiveness
Size of government and citizens’ perception of their effectiveness, 2013
Size of government (underlying primary spending, % of potential GDP)
55
FRA
DNK
FIN
BEL
50
SWE
AUT
45
ITA
HUN
SVN
DEU
PRT
40
POL
GRC
SVK
EST
ESP
35
USA
IRL
AUS
CHE
ISR
ISL
CZE
GBR
JPN
LUX
NLD
NOR
NZL
CAN
KOR
30
0.4
0.6
0.8
1
1.2
1.4
1.6
1.8
2
2.2
Perception of government effectiveness
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Estimates of decreasing returns to public
investment
The effect of public investment on potential GDP decreases with the
level of capital stock
GDP gain of one spending point increase of public investment, in per cent
15
10
Japan
5
0
-5
-10
United States,
Luxembourg,
Iceland
-15
20
40
60
80
100
120
Public capital stock, per cent of potential GDP
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Estimates of decreasing returns to public
investment
Most countries have room to increase the stock of public capital (2013 data)
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More information
Fournier, J-M. and A Johansson (2016), “The effect of the size and mix of
public spending on growth and inequality”,
OECD Economics Department
Working Papers,
No. 1344.
Bloch et al. (2016), “Trends in public finance: Insights from a new
dataset”,
OECD Economics Department Working Papers,
No. 1345.
Johansson, A. (2016), “Public finance, economic growth and inequality: A
survey of the evidence”,
OECD Economics Department Working Papers,
No. 1346.
Fournier, J-M. (2016), “The positive effect of public investment on
potential growth”,
OECD Economics Department Working Papers,
No.
1347.
Disclaimers:
The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data
by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank
under the terms of international law.
This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the
delimitation of international frontiers and boundaries and to the name of any territory, city or area.
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Impact of different instruments on
growth and equity
Policy
Low to moderate
government
effectiveness
High government
effectiveness
Growth
+
n.s.
+
+
+
+
n.s.
+
Equity
-
-
+
0/+
n.s.
n.s.
+
-
Income of
the poor
+
-
+
+
+
+
+
n.s.
FRA, GRC, HUN, ITA, SVN
CHL, GRC, MEX, PRT, TUR
BEL, DEU, GBR, IRL,
ISR, ITA, MEX, TUR
AUT, DEU, FIN, FRA, GRC,
ITA, JPN, POL, PRT, SVN
CHE, ESP, GRC, PRT
BEL, CHE
Countries with the most
room for growth gains
BEL, CZE, FRA, GRC,
HUN, ITA, POL, PRT, SVN
Decreasing the size of
government
Increasing government effectiveness
Increasing education outcomes
Increasing public investment (including R&D)
Reducing pension spending
Increasing family benefits
Decreasing public subsidies
Note:
+ stands for a positively significant, – for a negatively significant and n.s. for non-significant effect.
Source:
Fournier and Johansson (2016), “The Effect of the Size and the Mix of Public Spending on Growth and Inequality”,
OECD Economics Department Working Papers, No. 1344.
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