Corruption, taxation and their effects on social expenditure in OECD countries

Although corruption has been analyzed since mid ‘60s, studies describing its effects on public expenditure are still not widespread. Studies which consider the impact on health expenditure and on the quality of health care are even less frequent. This work is aimed at assessing the effect of perceived corruption on growth for social expenditure for European countries, controlling for fiscal policies and the share of public health expenditure. The issue of corruption is firstly examined through a broad review of the existing literature. Corruption is considered among the factors that limit the growth of social spending and, as a consequence, can have an impact on health expenditure and on the quality of healthcare. The present analysis has been carried out for a panel of 25 European countries. Data are extracted from the OECD database; random effects in a GLS estimation are employed to deal with individual heterogeneity due to country differences. The estimated equation considers, as dependent variable, the growth rate of per capita social spending. The regressors employed are the index of perceived corruption, as calculated by Transparency International for each country, fiscal revenues as percentage of GDP, the share of public health expenditure over total health expenditure, per capita GDP, life expectancy at birth, and the level of social expenditure in the first year of observation . Some interaction terms have been considered, as the combined effect of public health expenditure and the corruption index, that outlines if in the most corrupt countries the greater role attributed to the Government may counterbalance the negative effects of corruption; and the interaction between corruption and public revenues, that illustrates the impact of taxation on social expenditure when there is corruption. Moreover, there are some country differences too. From the descriptive statistics, it emerges that the higher the values of CPI reported, the higher the quality of governance (i.e., the lower the corruption perceived). Scandinavian countries always do rank among the first 10 countries when looking at quality of governance; Mediterranean and Eastern European countries, instead, are characterized by the low quality of governance perceived by residents. In particular, Italy shows a decrease of 1.4 points in the quality of institutions along time, followed by United Kingdom (-1.1). The countries that register the lowest CPI values, present the highest levels of growth of social expenditure. Scandinavian countries, whose CPI is the highest, do rank inversely with the average growth rate of social spending. As expected, in the estimated GLS models, government revenues negatively affect the growth of per capita social spending. There is a significant correlation with the CPI: that would mean that the higher the perception of good governance, the lower the growth in social expenditure. About the effect of fiscal policies, the inverse and significant correlation with revenues demonstrates that, in countries characterized by a high quality of governance, a high level of taxation determines a decrease in the growth rate of social spending.