Volatility of public spending in EU Member States

Executive summary This paper discusses volatility in general government spending in EU countries. While this volatility has on average declined over time when measured by its standard deviation, a large cross-country variation in the degree of volatility can be observed. Estimates covering all EU-27 countries indicate that high volatility tends to be associated with fast growing government spending, with a small government sector, with high GDP volatility, and with unbalanced public finances. We also find some evidence that changes in revenues, which partly reflect cyclical effects, affect expenditure growth in a numbers of countries. Empirical estimates for EU-15 countries indicate that in some countries revenue changes partly “cause” expenditure changes, the precise countries concerned differing according to the methodology applied. Given that negative effects of public spending volatility on short-and long-run economic growth prevail in the literature, the conclusion that part of spending volatility is driven by revenue volatility argues in favour of strengthening domestic institutions that cut the link between revenue growth and spending growth, such as expenditure rules.