GovernmentExpenditureCompositionandGrowthinChile.docVIP

Government Expenditure Composition and Growth in Chile November 30, 2006 Carlos J. García Santiago Herrera Jorge E. Restrepo Introduction The purpose of this paper is to examine and quantify the impact on growth of alternative budgetary compositions, with a model that captures some of the specific stylized facts of the Chilean Economy. We also want to test the effects of larger social security payments if the pension system is actually reformed as the current administration promised. Total public spending as a share of GDP has evolved through time and across regions with little or no relationship with growth rates, at least since the 1980’s. Table 1 shows the decadal average of total public spending (ratio to GDP) and average per-capita growth rates in the different decades since 1980. In general, the public spending ratio is decreasing, while growth rates show diverse behavior: stable (EAP), increasing (MNA), a high-low-high pattern (AFR), or a low-high-low pattern (LAC). The only region (SAS) with a clear rising trend in the spending ratio shows a decreasing trend in growth rates, though it is the highest of the whole sample. On the other hand, the composition of public expenditure has varied significantly with clear patterns across regions and through time. One of the trends is the rising share of interest payments in almost all the regions (Figure 1). Another notable trend is the rising importance of social security payments. Developing regions, more specifically, AFR, ECA, and LAC, experienced substantial increase in public spending on social security in the last decades. Finally, agriculture spending and transport and communication are decreasing in importance within central government budgets (Table 2). Chile is an exception regarding some of the features above mentioned. For instance, as a percentage of GDP, interest payments as well as defense expenditures and social security payments have declined steadily between 1990 and 2005. Mor