Expenditure Composition and Institutional Reform in Europe: A Policy Perspective

Abstract

This paper evaluates adherence of EU member states to the agreed policy recommendations to (i) redirect public expenditure towards growth-enhancing items and (ii) to improve the efficiency and control of public expenditure. Results show that countries that have been at the forefront of institutional reform (i.e. ES, NL, FI, DK, SE, UK) also managed to redirect their public expenditure towards public investment (as a proxy for physical capital) and education (as a proxy for human capital). Furthermore, some countries that recorded large decreases in interest payments (EL, IT) largely used this room for maneuver for increasing expenditure on government consumption and on transfers, while opportunities for redirecting public expenditure were limited in other countries due to a relative increase in interest payments linked to increasing budget deficits (DE, FR).