Public Policies Influence on Fiscal Deficit in the EU-28: Common Correlated Effects Approach

Abstract

This paper empirically investigates heterogeneous effects of different public policies (health, education, pension expenditure) on fiscal deficit in the circumstances when fiscal sustainability became questionable in EU economies. The research is based on the sample of EU-28 over the period 1995­ 2015. The empirical analysis is conducted within the econometric framework of heterogeneous, crosssectional dependent panels, using common correlated effects approach. According to the main findings of the paper, different effects of public policies between groups of developed and emerging European economies are evident but not crucial. These effects on fiscal deficit are heterogeneous across all countries, with different magnitude of pension, health and education expenditure impact. Due to the population ageing, pension expenditure has the most frequent and the most intensive influence on fiscal deficit deepening, following by education expenses. It means that policymakers are facing with trade-off related to old/young population, and that they are mostly oriented toward old population (voters).