The Effects of Social Spending on Economic Activity: Empirical Evidence from a Panel of OECD Countries

Authors


  • Submitted June 2010.

  • The authors would like to thank the editor Antoine Bozio and an anonymous referee for helpful comments and suggestions, and Romain Bouis, Orsetta Causa, Massimo Giuliodori, Peter Hoeller, Artur Radziwill, Lukasz Rawdanowicz, Eckard Wurzel and participants at an OECD Economics Department Seminar and the XVIII Encuentro de Economía Pública, Málaga, 3–4 February 2011 for useful discussions. The views expressed in this paper are those of the authors and do not necessarily represent those of the IMF or its member countries.

Abstract

The aim of this paper is to assess the short-term effects of social spending on economic activity. Using a panel of OECD countries from 1980 to 2005, the results show that social spending has expansionary effects on GDP. In particular, we find that an increase of 1 per cent in social spending increases GDP by about 0.1 percentage points, which, given the share of social spending in GDP, corresponds to a multiplier of about 0.6. The effect is similar to that of total government spending, and it is larger in periods of severe downturns. Among spending subcategories, social spending on health and on unemployment benefits have the greatest effects. Social spending also positively affects private consumption, while it has negligible effects on investment. The empirical results are economically and statistically significant, and robust.

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