What do OECD countries cut first at a time of fiscal adjustments? A dynamic panel data approach

Following the present atmosphere of budgetary cuts we analyze the effects of fiscal consolidation on the composition of government expenditures by functions. Using a dynamic voter group decision model and exploiting the panel structure of the dataset – 26 OECD countries over the period 1970-1997- by GMM estimation we find that fiscal adjustments protect social expenditure. Nevertheless, we find that among social expenditure, those being also productive such as education and health are even more protected than those not being productive as social welfare expenditure. Moreover, fiscal adjustments do not fall primarily over the most productive expenditure, transport and communications, but over defense and economic services.