Hence, the Austrian MoF has developed a pragmatic approach, which tries to capture the time-dimension
and dynamism in the budgets. For example, spending pressures could come from past commitments and
will continue to follow a further upward trend, c.f. due to the ageing of populations. Under the no-policy-
change assumption, the share of overall public spending in GDP and thus the tax gap will increase
significantly (where the tax burden shows an already high level in many EU countries). Alternatively,
when keeping the total level of spending as percentage of GDP constant, spending on public pension and
health care will crowd out more productive spending of other budget categories. In both cases, public
budgets will exert a clear negative impact on the allocation of resources and thus GDP growth, even
compared with today.
The Austrian dynamic approach classifies expenditures along the three different vectors of time: past,
present and future. Before the recent reform initiatives in Austria, roughly 2/5 of public spending were
related to the past and the present time, respectively, while spending for the future amounted to roughly
1/5. The following examples highlight the three vectors:
- Expenditures based on past decisions and legal entitlements. These expenditures are rooted
evidently in the past, such as the obligation to pay interest for outstanding public debt or to pay
public pensions. They typically belong to the field of income distribution and are thus
characterised that they will not give rise to strong supply-side effects in the future. As far as
Europe is concerned, expenditures related to past policies have increased significantly over the last
three decades, mainly due to rising deficit-induced interest payments. Whilst pension outlays have
been high but less dynamic due to fairly favourable demographics, these expenditures are expected
to go up by 3 to 5 pp of GDP in most EU countries due to ageing populations. - Expenditures designed to serve the present system ("system-keeping" expenditures): firstly,
those necessary to run the economic, legal and social system of a country, such as expenditures for
administration, justice and home affairs, defence; secondly, to maintain the productive potential of
the work force, such as health care and many social transfers. - Expenditures with a positive impact on the future supply-side and the growth potential of the
economy. Among those are public infrastructure investments, spending for R&D, mostly
education, and some subsidies to enterprises, etc. As far as Europe is concerned, these
expenditures have declined.
This list is not exhaustive and may be categorised differently according to specific circumstances in a
country. For instance, subsidies to enterprises might be used to compensate for market failures or in order
to avoid bankruptcy (in this case the system of national accounts makes no difference!).
The categorisation is showing the political room for manoeuvre:
- The higher the share of expenditures for the past (to a large extent for the present, and partly for
the future) is, the more policy is locked-in into commitments of the past and the smaller is the
short-term room for manoeuvre, or, policy risks time-inconsistency (e.g. by writing-off public
debt, cutting pensions etc.). - Expenditures for the future typically show the highest degree for discretion.
When applying this categorisation, economic policy conclusions are clear-cut:
- Spending on the past should be contained as much as possible.
- For spending on the present, efficiency should be checked, inter alia, by international
benchmarking. - Expenditures related to the future should be expanded for reasons of enhancing the growth
potential of an economy.