The Directorate-General for Economic and Financial Affairs (DG ECFIN) of the European Commission has organised 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.