SOCIAL PROTECTION EXPENDITURES IN CENTRAL AND EASTERN EUROPEAN COUNTRIES: DOES GOVERNMENT DEBT MATTER?

Abstract

The paper examines the potential effect of government debt on the social protection expenditure level in Central and Eastern European countries. More specifically, we examined whether governments reduce social protection spending when the fiscal stance worsens and when debt rises, in order to avoid fiscal unsustainability. This is a topical issue, given the population ageing and the level of indebtedness in some countries. Many studies have explored the economic and fiscal effects of rising social protection expenditures, but a few studies have examined the reaction of this specific expenditure category to rising debt levels. In addition, we examine the response of social protection expenditures to the changes in the level of economic activity, unemployment, inequality and population ageing. We found a small, but statistically significant positive effect of government debt to social protection expenditure, in line with the argument of coexistence of rising debt levels and rising social expenditure during recession and confirming their resilience to spending cuts. It could also be argued that these countries are not excessively indebted, and this could potentially contribute to the smaller response to increased debt levels. The results also indicate a negative impact of general government balance, implying that improved fiscal balance leads to lower social spending. The counter-cyclical nature of social protection expenditures is confirmed with the negative impact of GDP growth and the positive impact of unemployment. The negative effect of the Gini coefficient indicates that countries with lower inequality levels dedicate more resources to social protection. We didn’t find a strong influence from the dependency ratio.