Though the European Union as a whole has adopted common recom-mendations on the directions of economic policies4, both the sizes and structures of the spending broken into the foregoing groups remain within full autonomous competences of the individual states. There-fore, specific groups of the spending are diversified in terms of their
4 Section 121.2 of the Treaty on the Functioning of the European Union, consoli-dated version of the Treaty on the Functioning of the European Union, Official Jour-nal of the European Union C 83/01 of 30/03/2010.
dynamics and naturally, to some extent, in weight. In spite of that, viewed from the perspective of the whole group, the structure of the spending remains relatively stable, which can be seen in Figure 2.
Figure 2. The structure of spending in the UE-27 states by the COFOG functions (%)
Source: Own study based on Eurostat’s data (the data was published with a one year delay, so the data for 2012 could not be presented at this point).
The spending on social protection has the largest share of the pub-lic expenditure: 39.9% of the total spending in 2011, a growth 0.9%
from 2002. The share of GDP changed during the deliberated period from 18.2% to 19.6%. The aggregate growth of the nominal spending during that period was 37.3%. The spending of France (22.8%), Italy (13.9%), Spain (12.6%), Germany (8.2%) and the UK (7.5%) had the greatest shares of this growth. However, the figures for these countries varied significantly in terms of their nominal dynamics: 47.6% for France, 40.9% for Italy, 89.7% for Spain, 19.2% for the UK and just 12.2% for Germany. This affected the dynamics aggregated for the UE-27 because of the huge contribution of Germany whereas most
countries saw expenditure growth dynamics significantly exceeding the mean ratio.
The spending on the health care sector was the second largest cate-gory of the spend: 14.9% of the spending in 2011, a growth of 1.1%, or from 6.4% to 7.3% of GDP, from 2002. The aggregate growth of the spending on health care was 45.3%. For the spending on health care, the changes in individual countries followed the foregoing change in the share of GDP. Only Germany did not sign up to this trend (just 0.1% growth of the share of GDP, compared to 1.8% for the UK and 3% for Spain).
The third spending category in terms of size was the overall func-tioning of the state. Its share in the total public spending decreased by 0.7% to 13.5%. Its share of PKP in the UE27 changed slightly: 6.6%
in both 2002 and 2011. The situation of individual countries varied significantly. The highest share of this spending in GDP was noted in Greece (12.8%, +2.5% from 2002), Cyprus (11.1%, +1.5%), Hungary (8.7%, 1.2%) and Italy (8.6%, 0.8%). Ireland saw a growth of 2.1%
but to the lower than average level of 5.5%. Note that this function includes the costs of servicing the public debt in addition to the spend-ing on the broadly defined public administration. The change of the share of this function in public spending followed the changes in the debt servicing costs in most cases.
The fourth largest category was the spending of education with the 10.9% share in 2011, which meant a drop of 0.3%. Relative to GDP, this spending amounted to 5.3%, 0.1% more than 10 years earlier. The level of this spending remains relatively fixed throughout the EU.
The fifth spending category, economic matters, represented 4.0%
of the GDP in both 2002 and 2011 for the UE-27. This category had an 8.2% share of the total public spending for 2011. The transient growth of the spending on the economic matters function between 20082010 requires a separate explanation. The spending on economic matters grew slightly slower than the overall spending until 2007. The effect of the individual countries on the significant 13.7% (65.6 billion EUR or approx. 0.5% of GDP) growth of the spending on economic matters noted in 2008 was, obviously, varied and depended (though not wholly) on the national economies size. The following states had the largest shares of this growth (year-to-year): the UK 45.6%, Ger-many 13.6%, Spain 5.9%, Poland 5.4%, Greece 5.3%, Ireland 4.1%
and the Netherlands 3.9%. The growth of these outlays relative to GDP illustrates the actual burden from the costs of the public interven-tion related to the bailout of the banking sector. The largest growth rates were noted in the UK (2.1% of GDP), Ireland (1.7%) and Greece (1.4%). The growth of spending on economic matters relative to GDP in Germany, Spain, Poland and the Netherlands ranged from 0.2% to 0.3%. Note, further than the additional funds for this area were allo-cated by Poland, which was attributable mostly to the co-financing of the structural investments supported with European funding. The spending on economic matters stabilized in 2009 and grew by a fur-ther 6.9% (37.8 billion PLN or 0.2% of GDP) in 2010, provided that the sources of growth concentrated in two countries. These outlays amounted to the unprecedented 25% of GDP in Ireland (a change by as much as 17.8% or 27.5 billion EUR, year-to-year) and increased by 0.9% of GDP in Germany. Other countries saw both increases and drops in the outlays of this function.
Figure 3. Growth of the UE-27’s public spending by function between 2002 2012 (EUR M)
Source: Own study based on Eurostat’s data.
The remaining five groups of the expenditures represented just about 1/8 (12.6%) of the total spending in 2011. Their shares remained relatively stable (as shown in Figure 3). The spending on public safety and order represented 3.9%, national defence 3.0%, organization of leisure, culture and religion 2.2%, environmental protection 1.7% and housing and municipal management 1.7%. The demotion in priority during the period under review, concerned the national defence and housing and municipal management (a drop of 0.4% each).
The changes noted for each category of public spending are clearly a consequence of two trends (limited rate of growth of GDP and fiscal consolidation) observed during the two last years of the deliberated period. The share of the spending on social protection, health care and environmental protection was larger than the share of these categories on the aggregate spend. For the public safety and order and health care the proportions were similar to each other. For the remaining catego-ries of the spend, the share in the growth of the expenditure was lower than the share in the aggregate spend, which means a decline in prior-ity. Forcing the spending on social protection and health care strength-ened consumer demand while additional investing demand was related to the spending on economic matters and environmental protection.
Using the available data on public spending broken into the COFOG functions, does not allow for grouping the functions according to the four categories (set out in points 14 below) of varying effectiveness and the effect on economic growth. However, we can attempt to draw certain conclusions for the whole UE-27. The costs of servicing the public debt (category 1) increased throughout the examined period, inhib-ited as part of the “overall functioning of the state” spending category with the reduction of spending on other purposes, unfortunately, at the cost of the growth potential. However, the expenditure from categories 2 and 3 did not exceed a threshold share of GDP that would indicate the adverse effect of the spending on the performance. The expendi-ture of category 4, featuring relative proportional effects on the per-formance was, regretfully, the one most trimmed as part of consolida-tion processes. The picture varied depending on the country (e.g., Greece or Portugal). Specifically, we could find adverse consequences of forcing excessive growth in the spending of category 2 (public sec-tor salaries, early retirement benefits, public consumption funds) in the initial year of the period concerned and a dramatic growth of the spending from category 1 (debt service costs) during the crisis.
4. UE-27’s spending vs. GDP growth and investments between 2002–2012
In the context of the foregoing review of public transfers it is impor-tant to compare the results with the data referring to the economic life indices to find out whether and to what extent these factors are corre-lated. This is why this subsection will review the available statistics of GDP, consumption, investments and the public spending in the Euro-pean Union (UE-27) between 2002–2012. The pre-2000 consolidation processes led to a rapid reduction of the share of public spending in GDP and reaching the bottom level of 44.8% in 2000. The ratio saw a slight growth between 2001–2003, then started to decline as of 2004 and reached another low level in 2007 (45.6%). The growth of the public spending and stabilization of the nominal GDP (with a signifi-cant drop of 4.3% in real terms in 2009) in the following years con-tributed to a major growth of the share of the public spending in GDP (51.1% in 2009 and 49.4% in 2012). The volume of consumption rep-resenting approx. 80% of the aggregate GDP for UE-27 (varying be-tween 77.3% and 80.7% bebe-tween 20022012) had much to say about the dynamics of the aggregate GDP, as shown in Figure 4.
Figure 4. The actual rates of growth of GDP, consumption
and public spending (left axis) vs. Public spending to GDP ratio (right axis)
Source: Own study based on Eurostat’s data.
After 2007, most of the EU countries took advantage of the demand impulse to sustain the growth which, among other factors, contributed (in some cases) to the aggravation of the state of public finance with-out enabling to achieve the expected result, i.e., economic upturn. The growth of the scale of redistribution of income and the imposition of new, or a major extension of the existing, expenditure titles produced, after the year of the breakdown (2009), a short-term growth stimulus (2010). In the environment of practically fixed GDP levels in the UE-27 after 2007, the growth of the public spending volume produced excessive deficits in the public sector.
The data on average annual nominal change (see Figure 5) reflects quite clearly the mid-term trends for the whole of the 2003–2012 pe-riod and the effect of the post-2007 breakdown on the development of the main macroeconomic aggregates. The growth of GDP by 2.6%
was followed by the growth in consumption and the public spending by 2.8% and 3.2%, respectively. The average annual real growth for this period was 1.2% for GDP and 1.1% for consumption. The mean real growth of the public spending measured using the GDP deflator method was 1.8%.
Figure 5. Accumulated consumption dynamics in UE-27 in nominal terms (2002 = 100)
Source: Own study based on Eurostat’s data.
The cumulated growth of consumption for the public and private sectors between 20022012 amounted to 37.9% and 29.7%, respec-tively, as a result of which the share of the governmental and self-governmental institution sector in the total consumption increased from 35.0% to 37.1%. In nominal terms, the aggregate consumption during that period grew by 2,249.2 billion EUR, given the public spend-ing growth by 1,577.0 billion EUR while the major growth within this spending by 1,120.1 EUR occurred in three groups (social protection, health care, and education).
Figure 6. Accumulated dynamics of investments in UE-27 in nominal terms (2002 = 100)
Source: Own study based on Eurostat’s data.
During the period concerned the public investments grew by approx.
48% between 2002 and 2009, the rate declined to approx. 30% in 2012.
The private investments increased to the maximum extent by approx.
35% in 2007, in 2012 they were approx. 17% higher than in 2002. The share of the public investments in the aggregate investments ranged from 13.3% in 2002, through to 16.9% in 2009, to 14.7% in 2012.
Both the consumption and investing demand of the public sector between 2002 and 2012 showed higher dynamics than the one of the private sector. To some extent, this was an effect of the cycle-suppressing fiscal policy pursued in a much imperfect way because of excessive deficits during the years of economic upturn preceding the post-2007
breakdown. In addition, the consolidation efforts of 2012–2013 again froze the growth processes throughout the European Union. The po-litical dispute associated with the consolidation did not tip the balance to the side of the followers of greater interventionism and conse-quently, higher spending. Besides this, for the countries most affected by the crisis, there are no thinkable sources of financing higher spend-ing. Some believe the central banks (including the EBC) played an important (detrimental) role during the financial crisis of 2007–2009.
Given the clear asymmetry with respect to the goals and responsibili-ties between the central banks and governments, the extraordinary (regarding the size) consequences of the financial crisis placed exces-sive loads on the public spending in a few countries (Ireland, Greece and Cyprus). However, we are seeing a very slow evolution in the anti-crisis efforts of the EBC.
5. Conclusion
The fiscal stimulus applied during the crisis sustained consumption of more than the aggregate GDP. This has been particularly clear since 2010. The share of the public spending in GDP increased after 2008, mostly as a result of GDP variability but also in connection with the increasing volume of this spend. The 2012 downturn was partly re-lated to the forced process of fiscal consolidation. The privileged role of the spending on social protection, health care and education should be confirmed. Containing administrative expenses is reasonable. We can expect long-term beneficial effects of the foregoing spending prefer-ences on the growth of social capital and then, the economy as a whole.
The limited flexibility of public spending (in terms of both the ag-gregate volume and the internal structure) results from many causes:
legislative and political, but also social. We should also note that the important factors affecting changes in the structure of the spend:
demographic, cycle-suppressing fiscal policy or consolidation proc-esses. However the influence of such instruments often produces sur-prisingly varied results (short and long term).
The growing share of public consumption indicates that given the collapse of the growth trend, public consumption was sustained by steadily growing public spending. Although the structure of public spending by the COFOG functions throughout the UE-27 varied little
throughout the deliberated period because of the most important share of the spending on social protection and the largest share of this spending in the growth of expenditures (next to health care and educa-tion), we can note the importance of this spending for the up keeping of the demand.
References
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