Evolution of Government Expenditure by Function_100414

Evolution of government expenditure by functionGeneral government expenditure by economic function - EU-27 expenditure on social protection stood at 19.9 % of GDP in 2012 and health expenditure at 7.3 %

Statistics in focus 8/2014; Authors: Laurent FREYSSON, Martim ASSUNÇÃO, Michele MAROTTA, Laura WAHRIG ISSN:2314-9647  Catalogue number:KS-SF-14-008-EN-N

This publication analyses global trends in the structure of general government expenditure breakdown by their main socio-economic function (according to theClassification of the Functions of Government - COFOG), with a focus on social protection expenditure.

Eurostat collects data on general government expenditure by economic function according to the international Classification of the Functions of Government (COFOG) in the framework of the European System of National Accounts (ESA95).

Figure 1: Total general government expenditure, % of GDP, 2012 -Source: Eurostat (gov_a_exp)

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Table 1: Total general government expenditure by function, 2012 (% of GDP) - Source: Eurostat (gov_a_exp)

Figure 2: Evolution of total general government expenditure, EU-27, 2002-2012, cumulated % of GDP

- Source: Eurostat (gov_a_exp)

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Table 2: Evolution of total general government expenditure, EU-27, 2002-2012, % of GDP and % of total expenditure

- Source: Eurostat(gov_a_exp)

Figure 3: Evolution of EU-27 general government expenditure on social protection, 2002-2012, % of GDP and % of total

expenditure -Source: Eurostat (gov_a_exp)

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Figure 4: General government expenditure on social protection, % of GDP, 2012 - Source: Eurostat (gov_a_exp)

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Table 3: Total general government expenditure on social protection, % of total expenditure, 2012

- Source: Eurostat (gov_a_exp)

Figure 5: EU-27 general government expenditure on social protection by transaction, billion EUR, 2012

- Source: Eurostat (gov_a_exp)

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Figure 6: General government expenditure on health, % of GDP, 2012 - Source: Eurostat (gov_a_exp)

Contents

1   Main statistical findings

o 1.1   EU-27 general government expenditure at 49.4   % of EU GDP in 2012

o 1.2   General government expenditure by function

o 1.3   Evolution of general government expenditure by function in light of the economic and financial

crisis

o 1.4   Social protection: the most important function of government expenditure

o 1.5   The group 'old age' has the largest share of expenditure on social protection

o 1.6   'Social protection' expenditure by economic transaction

o 1.7   Government expenditure on health

2   Data sources and availability

3   Context

4   Further Eurostat information

o 4.1   Database

o 4.2   Dedicated section

o 4.3   Methodology / Metadata

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Main statistical findingsIn 2012, EU-27 general government expenditure amounted to 49.4 % of GDP. Based on the latest available expenditure data by economic function for 2012, more than half was devoted to the functions ‘social protection’ and ‘health’, which accounted for 19.9 % and 7.3 % respectively of GDP. The other functions of government spending with a large share of government expenditure are ‘general public services’ (6.7 % of GDP), ‘education’ (5.3 % of GDP) and ‘economic affairs’ (4.1 % of GDP).

EU-27 general government expenditure at 49.4 % of EU GDP in 2012General government expenditure amounted to around EUR 6 380 billion in 2012 in the EU-27 or 49.4 % of GDP.

As a ratio to GDP in 2012, the highest levels of government expenditure were found in Denmark (59.4  % of GDP), Finland (56.7 % of GDP), France (56.6 % of GDP) and Belgium (55.0 % of GDP), while the lowest levels were found in Bulgaria (35.9 % of GDP), Lithuania (36.1 % of GDP), Latvia (36.5 % of GDP) and Romania (36.7 % of GDP). Switzerland (34.1 % of GDP) recorded the lowest level among all reporting EU and EFTA countries.

All EU Member States which joined the EU in 2004 or after continued to record a level of total general government expenditure below the EU average in 2012. Among those EU Member States which joined the EU prior to 2004, Ireland, Luxembourg and Germany had the lowest proportions at 42.6 %, 44.3 % and 44.7 % of GDP respectively.

General government expenditure by functionIn the EU as a whole, as well as in all EU and EFTA countries reporting data, ‘social protection’ was the most important function of government expenditure. In 2012, government social protection expenditure in the EU-27 was equivalent to 19.9 % of GDP (see Table 1), 0.3 % percentage points more than in 2011.

The next most important functions in terms of government expenditure were ‘health’ and ‘general public services’, amounting to 7.3 % and 6.7 % respectively of GDP in the EU-27 in 2012. ‘Education’ (5.3 % of GDP) and ‘economic affairs’ (4.1 % of GDP) followed. The remaining functions – ‘defence’ (1.5 % of GDP), ‘public order and safety’ (1.9 % of GDP), ‘environmental protection’ (0.8 % of GDP), ‘housing and community amenities’ (0.8 % of GDP) and ‘recreation, culture and religion’ (1.1 % of GDP) - together represented 6.1 % of EU-27 GDP in 2012.

The figures at EU level mask disparate situations in the Member States.

For instance, in Greece (13.8 % of GDP) and Cyprus (12.4 % of GDP), expenditure related to 'general public services' was significantly higher than in the other reporting countries. For Greece, this is partially due to interest payments to service government gross debt. Switzerland (3.1 % of GDP), Estonia (3.6 % of GDP) and Bulgaria (3.7 % of GDP) were the countries reporting the lowest levels of expenditure on 'general public services' for 2012. For Bulgaria, this was partially due to the low level of general government gross debt. After Estonia (9.8 % of GDP), Bulgaria (18.5 % of GDP) reported the lowest level of gross debt at the end of 2012.

The highest levels of total expenditure on defence were found in Greece and in the United Kingdom (2.4 % of GDP and 2.3 % of GDP respectively versus 1.5 % of GDP for the EU-27). In contrast, Iceland recorded only 0.02 % of GDP on defence in 2012. While Iceland is a member of NATO, it does not have standing defence forces and most functions undertaken by defence forces in other countries are assigned to the coast guard and police force (and would then be recorded under 'public order and safety'). In 2012, Ireland and Luxembourg (both at 0.4 % of GDP), Malta, Austria and Romania (all at 0.7 % of GDP) also had comparatively low expenditure on defence.

As regards government expenditure on economic affairs at the level of the reporting countries, there is considerable variation over time as the amounts recorded may be influenced by operations of an extraordinary nature, such as reclassification of public companies into the general government sector from a certain point onwards, sale of UMTS (mobile phone) licences recorded as negative expenditure, capital injections recorded as capital transfers, notably benefiting financial institutions and other categories of capital expenditures such as guarantee calls.

Capital injections into banks recorded as capital transfers explain the relatively high figures for Belgium and Spain in 2012. The importance of the 'economic affairs' division may furthermore be influenced by the amount of subsidies given to public or private transportation companies and even more by the amount of expenditure on transport companies classified within the general government sector.

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The Netherlands, Malta, the Czech Republic and Luxembourg devoted between 1.3 % of GDP and 1.7 % of GDP to 'environmental protection', while Cyprus, Finland and Sweden reported 0.3 % of GDP in 2012.

In 2012, the Czech Republic, together with Iceland, registered the largest ratio to GDP of government expenditure in the 'recreation, culture and religion' function (2.7 % of GDP). For the Czech Republic, this is largely explained by a restitution of assets to the Church in the fourth quarter of 2012.

Further analysis for some economic functions is described in more detail in the specific 'Statistics in Focus' publications devoted to the different COFOG divisions.

Evolution of general government expenditure by function in light of the economic and financial crisisOver the last decade, 'social protection' has remained by far the most important function in terms of general government expenditure as a ratio to GDP. This said, EU-27 expenditure on social protection as a ratio of GDP equalled 18.1 % in 2002, moved up to 18.5 % of GDP in 2003, before declining to 17.5 % of GDP in 2007. From 2007 to 2009, EU-27 expenditure on social protection increased by 2.5 percentage points of GDP to 20.0 % of GDP in 2009. This was due both to the evolution of GDP in current prices and social phenomena related to the economic crisis such as increases in unemployment.

EU-27 government expenditure on social protection then declined to 19.6 % of GDP in 2011, before increasing again in 2012. EU-27 expenditure on social protection continued increasing in absolute terms during the recent years.

During the period 2002-2008, total expenditure on social protection decreased by 4.7 percentage points (pp) of GDP in Slovakia, 2.7 pp of GDP in Poland and 2 pp of GDP in Sweden (and also by 2.6 pp in Norway). In contrast, increases were observed during the same period in Ireland (+3.8 pp), in Portugal (+2.6 pp) and in Romania and Hungary (both +2.3 pp). From 2009 to 2012, social protection expenditure as a ratio to GDP increased in all reporting countries, except Hungary, where it moved from 18.6 % of GDP in 2009 to 17.1 % in 2012.

The overall evolution of general government expenditure in recent years was to a large part driven by the evolution of social protection expenditure, the one-off events recorded in 'economic affairs' as well as 'general public services' including notably interest payments to service government debt (COFOG group 01.7 'public debt transactions'). Also, at EU-27 level, public expenditure on health significantly increased from 2009 onwards, when it exceeded 7 % of GDP, reflecting the evolution of GDP in the light of largely stable responsibilities of government.

Social protection: the most important function of government expenditureSocial protection retains the highest share of general government expenditureIn the EU-27, general government expenditure on social protection amounted to around EUR 2 572 billion in 2012, or 19.9 % of GDP. In all reporting countries, it is the most important function in public expenditure. As a ratio to GDP, the highest levels of government expenditure were found in Denmark (25.2  %), Finland (24.8 %) and France (24.4 %). The lowest ratios to GDP were found in Latvia, Iceland (both 11.2 % of GDP), Lithuania and Slovakia (both 12.1 % of GDP).

With the exception of Iceland, the Nordic countries all exhibit a relatively high level of expenditure on social protection, while those Member States which joined the EU after 2004 tend to have the lowest shares.

The group 'old age' has the largest share of expenditure on social protectionIn the countries for which detailed data is available, the breakdown of social protection expenditure by detailed COFOG group reveals different national structures.

In general, the category ‘old age’, which includes expenditure of first pillar pension schemes as well as expenditure on care for the elderly, is predominant and often represents 8.0 % or more of GDP or at least 40 % of total government expenditure on social protection. In most countries it is the largest COFOG group. While expenditure in this group accounted for up to two thirds of total social protection expenditure in Bulgaria, Greece, Italy and Latvia, public expenditure on 'old age' did not exceed one third of government expenditure in this division in Iceland, Croatia, Ireland, Norway and Denmark. It is only in Croatia, Iceland and Norway (due to the special situation of the Government Pension Fund) that 'old age' does not recorded the largest share of social protection expenditure.

'Sickness and disability' is predominantly the second most important group in social protection expenditure. In 2012 'sickness and disability' represented 20 % or more of social protection expenditure in the Nordic

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countries, Ireland, Hungary, Lithuania, the Netherlands and Croatia, where it represented more than half of the total of social protection expenditure.

Other relatively important groups are 'family and children', benefiting families with dependent children (20.3 % and 21.0 % respectively of total expenditure on social protection in Denmark and Luxembourg, or 5.1 % and 4.0 % respectively of GDP), and 'unemployment' (nearly 20 % of social protection expenditure in Ireland and Spain; in Spain this reflected the second highest level of unemployment in the EU - 25.8  % in December 2013).

'Social protection' expenditure by economic transactionAs regards the distribution of expenditure by transaction in 2012 (see Methodological Notes), 88.7 % of EU-27 public expenditure in the ‘social protection’ division concerns social benefits (social cash benefits and social transfers in kind supplied to households via market producers) to households, while compensation of employees and intermediate consumption account for 4.9 % and 3.6 % respectively.

This is a relatively common pattern across countries, although it can be noticed that the share of social benefits in social protection expenditure is lower than 80 % only in the Nordic countries, where this was accompanied by a higher share of compensation of employees.Government expenditure on healthHealth had the second highest share of EU-27 general government expenditure in 2012.In the EU-27, general government expenditure on health amounted to around EUR 948 billion in 2012, or 7.3 % of GDP. In most reporting countries, 'health' was the second largest function in public expenditure after social protection.

As a ratio to GDP, the highest levels of government expenditure were found in Croatia (9.2 % of GDP or 20 % of total public expenditure), the Netherlands (8.9 %), Denmark (8.6 %), France (8.3 %) and Finland (8.2 %). The lowest ratios to GDP were found in Switzerland (2.2 %), Romania (3.1 %) and Cyprus (3.3 %).

Data sources and availabilityReporting of data to EurostatAnnual government finance statistics (GFS) data are collected by Eurostat on the basis of the European System of Accounts (ESA95) transmission programme. Member States are requested to transmit, among other tables, table 1100, 'Expenditure of general government by function' twelve months after the end of the reference period. Table 1100 provides information about expenditure of the general government sector divided into main COFOG functions and ESA95 categories. The transmission of the COFOG I level breakdown (divisions) is compulsory for the years 1995 onwards, whereas information on the COFOG II level (COFOG groups) is provided on a voluntary basis. The main reference years used in this publication are 2012 as the latest year available and 2002 as the first year for which complete data on expenditure by function are available at EU-27 level.

Data was extracted on 25 March 2014.

Provisional dataData for Bulgaria (BG), Greece (EL), Hungary (HU), Iceland (IS) and Sweden (SE) (2012 only) is provisional.

Definition of general government and its sub-sectorsThe data relate to the general government sector of the economy, as defined in ESA95, paragraph 2.68: 'All institutional units which are other non-market producers [institutional units whose sales do not cover more than the 50 % of the production costs, see ESA95 paragraph 3.26] whose output is intended for individual and collective consumption, and mainly financed by compulsory payments made by units belonging to other sectors, and/or all institutional units principally engaged in the redistribution of national income and wealth’.

Classification of functional expenditure of governmentThe Classification of the Functions of Government (COFOG) classifies government expenditure into ten main categories (divisions known as the 'COFOG I level' breakdown): general public services; defence; public order and safety; economic affairs; environmental protection; housing and community affairs; health; recreation, culture and religion; education; social protection. These divisions are further broken down into 'groups' (COFOG II level). Further information is available in the EurostatManual on sources and methods for the compilation of COFOG Statistics.

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COFOG level II dataCOFOG level II data is published only in agreement with the country concerned. The development of COFOG level II data is not completed in many Member States and data needs to be looked at with this in consideration. The transmission of COFOG level II data for the general government will become compulsory by the end of December 2014.

For Belgium (BE) and Slovakia (SK), COFOG group data is available but not published. For Spain (ES), COFOG group data is available for 2012, but not published pending the availability of more final data.

Satellite accountsAdministrative expenditure data is additionally collected in so-called satellite accounts. In general, the amount of expenditure recorded in satellite accounts is expected to exceed the expenditure recorded under the respective COFOG division. For social protection, the relevant satellite account is ESSPROS. More details on the comparability of COFOG data with satellite accounts data can be found in the COFOG manual.

Definition of general government expenditureGovernment expenditure is defined in Commission Regulation 1500/2000 which uses as reference a list of ESA95 categories: Government expenditure comprises the following categories:

P.2, 'intermediate consumption': the purchase of goods and services by government; P.5, 'gross capital formation' consists of: (a) gross fixed capital formation (P.51); (b) changes in

inventories (P.52); (c) acquisitions less disposals of valuables (P.53); where P.51, 'gross fixed capital formation': consists of acquisitions, less disposals, of fixed assets during a

given period plus certain additions to the value of non-produced assets realised by the productive activity of producer or institutional units. Fixed assets are tangible or intangible assets produced as outputs from processes of production that are themselves used repeatedly, or continuously, in processes of production for more than one year;

D.1, 'compensation of employees': the wages of government employees plus non-wage costs such as social contributions;

D.29, 'other taxes on production, payable', D.3, 'subsidies, payable', D.4, 'property income, payable', consists of : (a) 'interest, payable' (D.41) and (b) 'other property

income, payable' (D.42+D.43+D.44+D.45), where D.41, 'interest': excludes settlements under swaps and forward rate arrangements, as these are

treated as financial transactions in the ESA 95; D.5, 'current taxes on income, wealth, etc, payable'; D.62, social payments: cover social benefits and pensions paid in cash; D.6311, D.63121, D.63131, 'Social transfers in kind related to expenditure on products supplied to

households via market producers'; D.7, 'other current transfers, payable'; D.8, 'adjustment for the change in net equity of households in pension fund reserves' D.9, 'capital transfers payable' K.2, 'acquisitions less disposals of non-financial non-produced assets': public investment spending.

Non-financial non-produced assets consist of land and other tangible non-produced assets that may be used in the production of goods and services, and intangible non-produced assets.

Capital investments includes P.5 and K.2. Other current expenditure includes D.7, D.29, D.5 and D.8.

Gross Domestic ProductThroughout this publication, nominal GDP, i.e. GDP at current prices is used.

Time of recording & symbolIn the ESA95 system, recording is in principle on an accrual basis, that is, when ‘economic value is created, transformed or extinguished, or when claims and obligations arise, are transformed or are cancelled.'":" not available"p" provisional"pp" percentage points

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More data and informationFor more country-specific notes, e.g. on missing data, please refer to the metadata published on Eurobase. The authors can be contacted at [email protected]

ContextIn the framework of the European System of National Accounts (ESA95), Eurostat collects data on general government expenditure by economic function according to the international Classification of the Functions of Government (COFOG) – see methodological note.

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