Expenditure-based consolidation: experiences and outcomes - Reference ECFIN 2014 009/C

"Expenditure-based consolidation: experiences and outcomes" Reference ECFIN 2014 009/C

Purpose and content of the workshop

The Directorate-General for Economic and Financial Affairs (DG ECFIN) of the European Commission is organising a one-day workshop around the outcomes of expenditure adjustments on 20 January 2015 in Brussels.

A proper design of fiscal adjustment is an essential aspect of a successful approach to consolidation. Economists often advocate putting emphasis on expenditure restraint as part of a well-designed consolidation strategy. There is no optimal government size, but the common presumption is that both potential efficiency gains in spending and the opportunity cost of incremental taxation increase more than proportionately with the size of the public sector.

This is also indirectly reflected in the EU policy advice to Member States (e.g. Council recommendations, EC's Annual Growth Survey), which stresses the relevance of an appropriate composition to the fiscal retrenchment and indicates that expenditure-based fiscal consolidations, even though having a higher multiplier in the short term, are more lasting, more credible and preferable in the medium-to-long term. This is especially true if the expenditure cuts preserve growth-enhancing items. The expenditure categories commonly focussed upon, in terms of positively affecting growth, are public investment, education and research and development (R&D). However, the latest trends in expenditure composition in the EU since the onset of the economic and financial crisis highlight a generalised increase in the share of social protection accompanied by a reduction in several other functions, including education, as well as a widespread tendency to cut public investments. It is also true that expenditure based consolidation, especially if relying on cuts in public wage bills, not only has direct effects on fiscal variables, but could also have indirect effects on labour markets, competitiveness and productivity, as well as distributional impacts.

On the whole, the available evidence tends towards top-down examinations at the aggregate level and neglects to explore the broader outcomes and considerations for policy-makers associated with specific expenditure reductions. Further research in this field is therefore desirable.

The workshop aims at covering the following main topics:

a) experiences of expenditure-focussed consolidations;

b) the broader outcomes of expenditure-focussed consolidations, including on:

• disaggregated fiscal multipliers;
• labour market outcomes;
• measurements of inequality;
• wider macroeconomic variables such as productivity and competitiveness.

a) Expenditure-based fiscal consolidation experiences

First, the workshop aims at shedding more light on the economic and the political determinants of the composition of expenditure adjustments. (e.g. Alesina and Ardagna, 1998, 2010 and 2011; Alesina, Favero and Giavazzi, 2012, Cahuc and Carcillo, 2011; Lane, 2003). Understanding the determinants of successful expenditure control is very relevant for the DG ECFIN at large, especially when providing support to Member States in the context of economic programmes.

The workshop aims at understanding the specificities of how public expenditure measures are relevant to the achievement of fiscal targets in the short-term, but also successful in containing the growth of public expenditure in the long-term. Empirical literature (e.g. Alesina and Perotti, 1995; Heylen et al., 2012; Hernández de Cos and Moral-Benito, 2012) tend to find that expenditure-based consolidations have a greater likelihood of success as they are perceived as more credible by economic agents. However, the need to design consolidation efforts in a manner that is growth-friendly must be considered, particularly in light of the temptation to focus spending cuts on public investment, which can have deleterious implications for long-term potential growth.

In the EU as a whole, a number of Member States have experienced sustained rises in public expenditure as a percentage of GDP over decades, while other countries have managed to introduce measures which have successfully controlled expenditure over in the medium to long-term. However the determinants of the evolution of public expenditure growth are diverse and the interaction amongst them is not uniform. In the long term, the demand for public services can increase with both income and demographic pressures. At the same time, the electoral weight of interest groups and the quality of fiscal and political institutions can also drive government spending.

Papers discussing or providing new data and institutional or other information on the determinants of public spending lines and theirinteraction with expenditure-control measures in different EU countries or the EU/euro area as whole, are welcome.

b) Secondary outcomes and considerations of expenditure based consolidation:

The primary aim of fiscal adjustment is to correct a weakness in a State's public finances as represented by the deficit or debt levels but the workshop also aims to explore some of the wider implications of expenditure-based consolidations, such as

• the implications for growth:there is a substantial economic literature attempting to estimate the size of fiscal multipliers and a degree of disaggregation is available, in particular separating out multipliers for tax policy, public sector wages, social transfers and capital expenditure (see Alesina & Ardagna 2010; Silva, Carvalho, Ribero 2013). The workshop aims to explore such distinctions further, in particular whether tools can be developed to help estimate the impact of specific expenditure measures. The implications of the wider macroeconomic environment is also of interest, in particular whether factors such as credit conditions or monetary policy can suggest certain policy measures are more growth-friendly than others.
• labour market outcomes: the surge in unemployment associated with the crisis has led many states to re-examine their levels of social transfers in tandem with reforms to their labour activation and taxation policies. Carling et al (2001) has looked at the implications of reductions in social transfers for incentives to take-up work but are they replicable across economies? Can off-setting increases to taxation bands or rates be paired with changes to unemployment benefits in order to leave replacement rates unchanged? The workshop will explore the impact of consolidation on labour markets (See Haan and Prowse, 2010; Turini, 2012) and if it is possible to separate out the impacts of policy measures and find an optimal balance.
• the impact upon measures of social stress:. The widespread episodes of fiscal consolidation in recent years have raised questions about the implications of these policies for inequality levels (OECD 2013). In particular, recent research has focussed on the impact of fiscal consolidation upon income inequality (Agnello and Sousa 2011 and 2013) as well as distributional effects through assessing the progressivity of fiscal packages (Avram 2013, Ball 2013). In relation to expenditure policy, the containment of public spending must find a balance between consolidation needs and the maintenance of adequate standards in the provision and quality of key public services such as education and healthcare, with some work (Mulas-Granados, 2005) showing expenditure-based adjustments being associated with higher income inequality than revenue-based ones. The workshop will therefore explore the impact of differing expenditure reductions on measures of social stress, including indicators of poverty.
• productivity developments and competitiveness: finally, the workshop aims at exploring the wider macroeconomic effects of expenditure reductions. The crisis has seen the need for many peripheral states in particular to engage in fiscal consolidation at the same time as long-standing imbalances in domestic economies are reduced. Research has suggested that deflationary policy shocks can put downward pressure on wages and hence improve competitiveness (in t'Veld, 2013). In the context of the loss of direct monetary and exchange rate policy, to what extent can expenditure policy be utilised to drive structural macroeconomic changes? Research has looked at the relationship between support for R&D or infrastructural investment (in Aschauer, 1989) but what are the wider impacts of public expenditure reductions on productivity growth?
• All the above topics could be addressed from either a theoretical or an empirical perspective. They should be based on the existing EU country specific policy experiences, in order to draw useful policy lessons to help European economies to overcome the current challenges.

Against this background the Commission invites the submission of proposals for research papers addressing the above topics.

General information and conditions

It is expected that six to eight papers are to be presented the day of the workshop, followed by the comments from discussants and a general exchange of views among the participants thereafter.

Selected authors will be required to send electronically a fully developed draft version of their paper to DG ECFIN by 14th November 2014 and to present it at the workshop on 20 January 2015. The final version of the paper must be submitted electronically by 28^th February 2015.

The final papers will have to be original work created in response to this call for papers and should be about 15,000 to 20,000 words in length.

In accordance with the conditions of the purchase order(195 kB)  , the Commission intends to pay a maximum total fee of €4,092.00 consisting of maximum €4,000.00 per selected and presented paper and a daily allowance of maximum €92.00 for one speaker per paper to present it at the workshop in Brussels, irrespective of whether the paper is authored or co-authored. The Commission will arrange and pay for travel and accommodation as well as. Such arrangements will be made via a travel agency, acting on behalf of the Commission.

Submission provisions

Candidates are invited to submit extended abstracts (up to 1,500 words) of research proposals related to the above mentioned topics. Papers can be co-authored.

 Extended abstracts must be submitted together with

• a duly complete application form(34 kB)  
• a curriculum vitae of the (co-) author(s)
• a list of publications of the (co-)author(s)
• signed proxy form(s), in case of co-authorship(14 kB)  
• administrative documents for the person/entity signing the contract in case of award: 
• legal entity form
• financial identification form

to the email ECFIN-PUBLIC-EXPENDITURE-2014@ec.europa.eu, clearly mentioning the topic of the paper proposal in the subject line of the email. This mailbox is reserved solely for submissions of proposals. Submissions sent to other mailboxes or to Commission staff cannot be accepted. No other communication can be addressed to this mailbox.

Deadline for submission of your proposal (extended abstract and the above required documents): 18 July 2014 (23:59 CET).

Award criteria

The award criteria for evaluating the submitted research proposals are as follows:

• clarity of the submission in: (i) outlining the topic, (ii) identifying its theoretical foundations and/or the empirical techniques to be used for analysis, as appropriate,  and (iii) specifying its policy implications (20 points)
• scientific standard: quality of the submission in terms of its potential to provide robust economic analysis and value added vis-à-vis existing academic literature (25 points) 
• value to policy making: relevance of fiscal policy implications of the proposed research in the European context (25 points)
• excellence of the (co-)author(s): research excellence demonstrated by academic achievements (i.e. track record of their published research on related issues in leading journals) (15 points)
• relevance of the subjects addressed: potential for a fruitful exchange of views among the workshop participants (15 points)

Award process

The submissions will be evaluated, receive points in accordance with the aforementioned criteria and then ranked with a view to select about 6 to 8 proposals. The assessment procedure is expected to be completed in the course of August 2014. Candidates will be informed in due time of the outcome of the procedure.

Publication and copyright issues

Copyright will be governed by the provisions specified in DG ECFIN’s Special Conditions attached to the purchase order. Conditional on quality, papers contributed to the workshop might be published in a volume collecting the workshop proceedings. The Commission will retain the copyright.

Further information

For any additional information please contact

Karim Triki, e mail: karim.triki@ec.europa.eu.

Matt McGann, email: matt.mcgann@ec.europa.eu.

Matteo Salto, e mail: matteo.salto@ec.europa.eu.

This invitation to tender is in no way binding on the Commission. The Commission's contractual obligation commences only upon signature of the contract with the successful candidates.

The period of validity of the tender, during which candidates may not modify the terms of their tenders in any respect, is 6 months from the final date for submission. 

Up to the point of signature, the Commission may either abandon the procurement or cancel the award procedure, without the candidates being entitled to claim any compensation. This decision will be substantiated and the candidates notified.

Once the Commission has opened the tender, the document shall become the property of the Commission and it shall be treated confidentially.

You will be informed of the outcome of this procurement procedure by e-mail. It is your responsibility to provide a valid e-mail address together with your contact details in your tender and to check it regularly.

If processing your reply to the invitation to tender involves the recording and processing of personal data (such as your name, address and CV), such data will be processed pursuant to Regulation (EC) No 45/2001 on the protection of individuals with regard to the processing of personal data by the Community institutions and bodies and on the free movement of such data. Unless indicated otherwise, your replies to the questions and any personal data requested are required to evaluate your tender in accordance with the specifications of the invitation to tender and will be processed solely for that purpose by Directorate General Economic and Financial Affairs. Details concerning the processing of your personal data are available on the privacy statement  .

Your personal data may be registered in the Early Warning System (EWS) only or both in the EWS and Central Exclusion Database (CED) by the Accounting Officer of the Commission, should you be in one of the situations mentioned in:

- the Commission Decision 2008/969 of 16.12.2008 on the Early Warning System (for more information see the Privacy Statement), or

- the Commission Regulation 2008/1302 of 17.12.2008 on the Central Exclusion Database (for more information see the Privacy Statement)