Euro Watch
Group Economics Macro & Financial Markets Research
21 June 2016
Government investment collapse • Aline Schuiling Senior Economist Tel.: +31 20 343 5606
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aline.schuiling@nl.abnamro.com
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During the years 2010-2015, the eurozone went through a period of tough fiscal austerity, which reduced economic growth During this period government fixed investment fell by more than 15% in the eurozone … … and by 50% in some peripheral countries, which tends to hurt economic fundamentals and limit private investment as well Meanwhile, tax income rose much faster than nominal GDP throughout the eurozone, lifting the tax burden that weighs on the economies … … implying that the fiscal policy mix that was chosen during the years of austerity might very well have a downward impact on economic growth in the eurozone in the longer term as well
Introduction Following the global financial crisis of 2008-2009, a period of fiscal policy tightening began throughout the eurozone. During the years 2010-2014 all big eurozone countries implemented austerity measures. In 2015, the result was more mixed, with fiscal policy neutral in the eurozone as a whole. Still, the majority of the biggest countries continued to tighten the fiscal policy reigns, so we have included this year in our analysis. According to estimates by the European Commission, 2016 will be the first year when budgetary policy, on average, will be expansionary in the eurozone as a whole. In this research note we take stock of the changes in the main components of the governments’ budgets during the period 2010-2015. We have looked at the eurozone aggregate and the eleven biggest individual countries. Changes in government income and expenditure % change 2010-2015 – eurozone aggregate
Social contributions Taxes Govt. investment Interest payments Comp. of employees Social benefits PM nominal GDP -20 -15 -10 -5
0
5
10 15 20 25
Source: European Commission, ABN Amro Group Economics
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2 Euro Wa atch – Goveernment invvestment coollapse – 21 June 2016
Total government expenditure increased du uring the periiod 2010-2015 5… Goverrnment spendiing rose in the e eurozone as a whole durinng the period 2010-2015. 2 Total expenditure e in ncreased by 7.5% during the e five-year perriod. Current expenditure e rose by b 10%. The la argest compon nent of current expenditure,, social transfe ers (with a share of 51%) incre eased by 14%,, while the sec cond largest co component compe ensation of go overnment employees - rose by almost 5 %. The only part p of curren nt expenditure e that actually fell f in the euro ozone as a whhole during the e five-year period d 2010-2015 iss interest expe enditure (5% of o current expeenditure), whic ch declined by alm most 4%. The latter seems to be the result of the ECB’ss policy measu ures, which lowere ed governmen nt bond yields,, as the level of o governmentt debt increase ed in all countrries. Governmentt investment reduced …
… and share off tax income iin GDP raised d
% change 2010--2015
% change c 2010-2015 5
40 0
30 20 10 0 -10 -20 -30 -40 -50 -60
30 0 20 0 10 0 0 -10 0 -20 0 -30 0 EZ BE DE IE GR ES FR Current government expend diture
IT
N AT PT NL Govvernment GFCF
Source: S European Commission, ABN N Amro Group Economics
FI
EZ BE DE E
IE
GR ES FR
Nom minal GDP
IT
NL AT PT
FI
Tax income
Sourc ce: European Com mmission, ABN Am mro Group Econom mics
… whereas govern nment investm ment declined … In con ntrast to curren nt governmentt expenditure, government ggross fixed capital formattion (GFCF) a and other gove ernment capita al expendituree declined during the years 2010-2015. F Fixed investme ent fell by 16% %, while other ccapital expend diture declined by almost 10%. In Greec ce, Spain and Portugal, GF CF plummeted by no less th han 50%, while e in Ireland an nd Italy it dropped by 30-40% %. The drop in govern nment investm ment during the years of aus sterity will probbably limit GD DP growth in the lon nger-term as w well. To begin with, governm ment investmeent in infrastructure, educa ation and techn nology improv ves productivity and the bussiness environment, which stimulates priivate sector in nvestment and d improves a ccountry’s compe etitiveness. Mo oreover, gove ernment investtment tends too have a direct positive spill-ov ver effect on p private sector investment as s well, for instaance via the co-financing c of projjects or publicc private partne erships for infrastructure invvestment. … and d taxes and s social securitty contributio ons rose On the e other side off the coin, eurrozone governments on agggregate received more income from taxes a and social sec curity contributtions during thhe period 2010 0-2015. Sociall contributionss increased by y almost 14% - roughly equaal to growth in social transfe ers. Meanwhille, income from m taxes on production and imports rose by b 20% and income from curren t taxes on inco ome and wealth increased bby 23%. The rise r in tax
3 Euro Wa atch – Goveernment invvestment coollapse – 21 June 2016
income was higher than the rise in nominal GD DP in all countrries during the e years 2010-2 2015, implying g that the tax burden on the e economy hass increased. This T reflects that go overnments a lso hiked taxe es as part of th heir austerity pprogrammes. In I general, a high her tax burden tends to weig gh on economic activity andd GDP growth in the longerr-term, by redu ucing incentive es to work and d invest althouugh the impac ct can vary depen nding on the tyype of tax and the structure of the econom my. That said, several econo omic studies1 ffind that, in ge eneral, austeritty measures bbased on cuts in govern nment expend diture tend to have h a less ne egative impactt on GDP grow wth in the longerr-term than au usterity based on tax hikes. Growtth in the peri phery to sufffer the most The most m striking diifferences betw ween governm ment finances during the period 20102015 in i the periphe ry and core is that total government expeenditure (curre ent expen nditure and fixe ed investmentt) fell only in th he four countriies that were in a EU-IMF suppo ort programme e during the crrisis (Greece, Ireland, Portuggal and Spain n). It grew in the res st of the big-1 1 countries. Meanwhile, M Greece was the only country were w curren nt expenditure e fell noticeably y during these e years (-30%)), with the restt of the ‘progra amme countri es’ merely cuttting government investmennt. With respec ct to the longerr term conseq uences of the austerity mea asures, it seem ms that the impact on econo omic growth wiill be largest in n the peripheral countries. W We have cons structed an austerrity drag indica ator, which combines the drrop in the sharre of government investment in GDP and the rise in n tax income in GDP. It turnns out that eco onomic growth h in Greece, S Spain, and Porrtugal might su uffer the mostt in the longer term from the po olicy mix that w was chosen du uring the years of austerity, while GDP grrowth in Germa any, the Nethe erlands and Belgium B will pro obably be hurtt the least. Lo onger-term drrag from austterity policy mix m Com mbined fall in gove rnment investmen nt and rise in tax in ncome, % GDP
8 7 6 5 4 3 2 1 0 GR ES
PT
FR
IT
EZ
FI
IE
AT BE B NL DE
Sourc ce: European Com mmission, ABN Am mro Group Economics
1
Fo or instance, OECD D Journal: Econom mic Studies “Fisca al multipliers and pprospects for cons solidation“, NBER Working Paper Seeries “Large chan nges in fiscal policy: taxes versus sspending“
4 Euro Wa atch – Goveernment invvestment coollapse – 21 June 2016
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