Energy Subsidies and Public Social Spending: Theory and Evidence

IMF Working Papers, May 6, 2015

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High energy subsidies and low public social spending can emerge as an equilibrium outcome of a political game between the elite and the middle-class.
This outcome is more likely when the provision of public goods is subject to bottlenecks, reflecting weak domestic institutions.

Data: A large cross-section of emerging markets and low-income countries.
Main empirical challenge: Subsidies and social spending could be jointly determined (e.g., at the time of the budget), producing a simultaneity bias in OLS estimates.
Identification approach: Subsidies in a given country are instrumented by the level of subsidies in neighboring countries (Instrumental Variable, IV).

IV estimations suggest that public expenditures in education and health were on average lower by 0.6 percentage point of GDP in countries where energy subsidies were 1 percentage point of GDP higher.
The crowding-out effect was stronger:
- in the presence of weak domestic institutions,
- with narrow fiscal space,
- among the net oil importers.

Authors: Christian H Ebeke, Constant A Lonkeng Ngouana
Date: May 6, 2015
Series: Working Paper No. 2015/101
Volume: 2015
Issue: 101
Pages: 30
DOI: https://doi.org/10.5089/9781475580747.001
ISBN: 9781475580747
ISSN: 1018-5941
Subjects: Consumption, Energy subsidies, Expenditure, Fiscal policy, Fiscal space, National accounts, Oil prices, Prices
Keywords: Causality, Consumption, Energy subsidies, energy subsidies data, energy subsidy, Fiscal space, Global, Oil prices, political economy, Public social spending, public spending, social spending, subsidy rate, subsidy regime, WP

Content derived from "Energy Subsidies and Public Social Spending: Theory and Evidence", IMF Working Papers 2015/101.