Reforming Public Expenditure in Industrialised Countries. Are There Trade-offs? Working Paper Series No

Abstract: In this paper, we show that over the past two decades several countries were able to reduce public spending by remarkable amounts. These countries did not seem to have suffered from these large reductions either in a macroeconomic sense, or in terms of lower values for socio-economic indicators. On the contrary, ambitious expenditure reform is correlated with more improvement in fiscal, economic, human development and institutional indicators. Benefits, in some instances, have taken a while to materialize and early and persistent reformers have, hence, already reaped more of these benefits. There seem to be some costs of expenditure reform in terms of income distribution within countries but these costs are small and they are mitigated in absolute terms by faster growth and by the possibilities of better targeting of public spending. Moreover, there is significant divergence across countries that suggest that country circumstances and reform design matter