Government Expenditure Composition and Growth in Chile

Transcription

1 Governmen Expendiure Composiion and Growh in Chile January 2007 Carlos J. García Cenral Bank of Chile Saniago Herrera World Bank Jorge E. Resrepo Cenral Bank of Chile

2 Organizaion of he presenaion:. Inroducion and Sylized facs 2. Model. 3. Calibraion of he model. 4. Policy Experimens. 5. Conclusions.

3 . Inroducion The purpose of his paper is o examine and quanify he impac on growh of alernaive budgeary composiions. We use a model ha capures some of he specific sylized facs of he Chilean Economy. One of he specific arges is o es he effecs of larger social securiy paymens. This is relevan given ha he pension sysem in Chile is being reformed.

4 Toal Expendiure and GDP per capia Growh 80s 90s 2000s 80s 90s 2000s AFR EAP % of GDP GDP p.c. Growh(%) % of GDP 37.9 ECA INL GDP p.c. Growh(%) LAC MNA % of GDP GDP p.c. Growh(%) SAS % of GDP GDP p.c. Growh(%) AFR Africa, EAP Eas Asia and Pacific, ECA Eas Europe and Cenral Asia, INL Indusrialized Counries, LAC Lain America and Caribbean, MNA Middle Eas and Norh Africa, SAS Souh Asia. Source: World Bank World Developmen Indicaors and IMF Governmen Finance Saisics Toal public spending as a share of GDP has evolved hrough ime and across regions wih lile or no relaionship wih growh raes. The public spending raio has decreased, while growh raes show diverse behavior.

5 Differen Regions: Composiion of Toal Expendiure (%, consolidaed cenral governmen) AFR EAP ECA INL LAC MNA SAS Agriculure Educaion Healh T & C Social Securiy Defense Order & Safey Fuel & Energy Mining & Manuf Public Service Housing Recreaion Oher Source: Calculaed using daa from IMF Governmen Finance Saisics The composiion of public expendiure has varied significanly wih clear paerns across regions and hrough ime A noable rend is he rising imporance of social securiy paymens. Agriculure spending and ranspor and communicaion are decreasing in imporance wihin cenral governmen budges

6 Chile: Composiion of Cenral Governmen Expendiure (% of GDP) Agriculure and ohers Defense Educaion Environmen Order & Law Healh Housing Public Service Recreaion Social Securiy Transporaion Ohers Source: Esadísicas de las finanzas públicas Miniserio de Hacienda- DIPRES several issues. Healh and educaion are increasing in imporance wihin cenral governmen budges Social securiy paymens is decreasing bu imporan as % of GDP.

7 2. Model: The Framework of General Equilibrium The model is overlapping generaion model was developed by Glomm-Rioja (2004) for Brazil, bu his version include addiional ypes of expendiure (mainenance of public capial) and changes in he calibraion parameers. The building blocks of he model are defined by he preferences, he echnology, and he resource consrains. Three crucial feaures are: Consumpion and leisure decisions are made by agens differeniaed by heir generaion: hey sudy when young, work in adulhood, and receive ransfers (social securiy) paymens when old. Governmen expendiure is producive (in infrasrucure and educaion) and unproducive (ransfer paymens o he old), affecing producion and consumpion decisions. Ineres raes depend on he size of public deb.

8 2. Model: Preferences Each generaion of households lives for hree periods: youh, adulhood and reiremen. Each individual, when young, is endowed wih one uni of ime which can be allocaed o learning or leisure. During adulhood he individual supplies labor inelasically, and allocae labor income beween curren consumpion and savings. When reired he individual lives on ransfers and reurns on savings. Specifically, preferences are given by ln( ) + ln c, + ln c, + n β () The evoluion of human capial follows he rule below: h φ µ ρ = Bn E h, 0 < φ, µ, ρ <, B > 0 (2)

9 2. Model: Preferences The uiliy maximizaion problem is solved recursively, saring wih he problem faced by aduls: max ln c, + β ln c, + s.. c, + s = ( τ L, ) w h (3) c, + = ( + ( τ K, ) r + ) s + T + given w,r, τ,,t,h ), ( + L, τ K, + Firs order condiions yields he savings decisions given by s = β + β L, T + β + ( τ + ( τ ) w h (4) K, + ) r +

10 2. Model: Preferences Replacing he opimal savings (equaion (4) ) ino he objecive funcion in he consumer s problem (3) yields an indirec uiliy funcion for he adul IUF β + β [( + ~ r ) w ~ h + T ] ln[ ( + β )( + ~ r )] + β ln( ) ln( n ) + ( + β )ln + + = + (5) The problem for he young is hence o maximize (5) wih respec o learning ime, subjec o he law of moion for human capial in (2). The soluion o his problem is defined by he following nonlinear equaion ~ φ µ ρ φ µ ρ ( + φ( + β ))( + r + w Bn E h + T + = φ( + β )( + r + w Bn E h ) ~ ~ ) ~ (6)

11 2. Model: Producion The aggregae producion echnology for he single non-sorable consumpion good is given by Y = AG ψ K θ H θ, 0 < Ψ, θ <, A > 0 (7) Public infrasrucure capial evolves according o G = ( G ( m )) G + I G, + δ (8) The privae physical capial evolves according o K = ( K ) K + I K, + δ (9)

12 2. Model: Producion The represenaive firm maximizes profis, aking as given he marke facor prices. Perfec compeiion dicaes ha he followings firs order condiions: The firm s profis maximizaion condiions in (0) imply ha privae physical capial will evolve according o he following pah ) ( ) ( K K Y H Y q w δ θ θ + = = (0) ) ( ) ( Ψ + = θ θ θ δ θ K r H G A K ()

13 2. Model: Fiscal Policy The governmen provides public goods, which is financed eiher by ax revenue or by borrowing The governmen expendiure as percen of GDP is disribue on invesmen in infrasrucure, on mainenance, on educaion, on ransfers, and on oher general public services (non-uiliy enhancing). The governmen collecs axes on labor income a rae and on capial (ineres) income a rae. I can also choose o raise deb o finance spending. Formally, he governmen budge consrain is given by D + + τ L, w H + τ K, r K ( G, + M, + E, + T, + P, ) Y + ( + r ( τ K, = )) D (2)

14 2. Model: Compeiive Equilibrium A macroeconomic equilibrium is defined by he following sysem, where uppercase leers indicae aggregae variables.. The household uiliy maximizaion problem is solved. Tha is, condiions (4) and (6) hold. 2. The represenaive firm s profis maximizaion problem is solved. Tha is, condiion (0) holds. 3. The governmen budge consrain (2) is saisfied. 4. The goods marke clears: C + S + Tax = Y + ( δ K ) K 5. The compeiive inpu marke for human capial (labor) clears: H = h 6. The ineres rae is deermined as suggesed by Schmi-Grohe and Uribe (2003), wih a deb elasic ineres rae as follows: D r = r * + R( ) (3) Y

15 3. Model Calibraion for Chilean Economy Table Benchmark Parameer Values Discoun Facor ( β ) Toal Facor Produciviy ( Α ) Human Capial parameer ( B ) Capial s Share of GDP (θ ) Public Capial Elasiciy (Ψ ) Public Educaion Expendiure Elasiciy ( µ ) Ineres rae sensiiviy o public deb (ξ ) Learning Time Elasiciy (φ ) Parenal Human Capial Elasiciy (ρ) Depreciaion parameer - public capial (γ ) Depreciaion rae - privae capial ( δ K ) Tax Revenue as a fracion of GDP (Tax) Transfers as a fracion of GDP ( T ) Public Educaion Expendiure ( E ) Public Capial Expendiure ( G ) Public Expendiure on Mainenance ( M ) Non-uiliy enhancing Public Expendiure ( P ) Labor income ax rae ( τ L ) Capial income ax rae ( τ K ) (.973) , calibraed o ge balanced growh 3.87, calibraed o ge balanced growh , calibraed o ge n = , calibraed o ge balanced growh 4.0, o mach 0% depreciaion per annum 0% per annum 20.5% 8% 6.3%.0%.0% 4.2% 20% 7% World Ineres Rae ( r * ) 5.58%

16 4. Policy Experimens I: increase in expendiure (% of GDP) GDP growh rae afer a permanen increase in expendiure Benchmark Transfer Educaion Benchmark Transfer Educaion Infrasrucure Mainenace Infrasrucure Mainenace

17 4. Policy Experimens II: increase in expendiure (% of GDP) GDP growh rae afer a emporary increase in expendiure Benchmark Transfer Educaion Benchmark Transfer Educaion Infrasrucure Mainenace Infrasrucure Mainenace

18 5. Conclusions We hink his is a useful firs sep in quanifying he impac on long run growh and income of alernaive budge composiions capuring key elemens in he Chilean economy. The paper s resuls provide quaniaive evidence supporing he hypohesis of he imporance of public invesmen in achieving higher income in he long run. Even hough he preliminary resuls of he simulaions show ha here is a cos, in erms of growh, of increasing social securiy paymens, his cos is low.

19 5. and fuure work I would be more realisic o model a non-linear elasiciy of public invesmen such ha produciviy of public capial decreases as he amoun of invesmen increases. I could be useful o model a funcion of efficiency of invesmen, such ha no all public invesmen is ransformed ino public capial. We could also consider increasing adminisraive coss of axaion. Fuure exensions of his paper could include public healh expendiures ha enhance human capial.

20 Governmen Expendiure Composiion and Growh in Chile January 2007 Carlos J. García Cenral Bank of Chile Saniago Herrera World Bank Jorge E. Resrepo Cenral Bank of Chile