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Prepared by Todd Mattina and Victoria Gunnarsson and based on an ongoing FAD research project on expenditure rationalization and efficiency in new member EU states by Marijn Verhoeven, Todd Mattina, Alejandro Simone, and Victoria Gunnarsson.
Potential distortions from restraining capital spending and goods and services include underinvestment in infrastructure, inadequate teaching aids (such as textbooks or computers) and medical supplies.
This approach is analogous to an aggregated form of performance–based budgeting.
Fiscal data correspond to the general government sector and are drawn from Eurostat.
The pattern of results in Table 1 is robust to detrended expenditure data using the Hodrick–Prescott filter.
Non–discretionary spending is defined as social benefits, interest, compensation to employees and subsidies.
The output gap is measured using the Hodrick–Prescott (1997) filter on logged real GDP. This approach is consistent with the EC methodology until 2002 and Schadler and others, (2005). This differs from official estimates of the output gap presented in the main Article IV staff report. The HP filter is also applied to primary spending as a percent of GDP to remove stochastic trends that would bias the results in Table 2. Regression analysis would be unreliable to estimate the relationship between primary spending and the output gap given the limited number of time–series observations for most NM–8 countries (11 or fewer) and significant structural shifts during the 1990s that could lead to spurious results in small regression models.
While primary spending appears relatively volatile in the NM–8 countries compared to the EU–15 (Table 2), this could reflect structural as well as cyclical factors.
The DRG system was implemented during 2002–04 and is now operating in all 19 acute–care hospitals.
There is also a minimum service requirement, however most service providers easily fulfill this condition. Deviations from budgeted compensation also depends on an incentive and penalty scheme to discourage an overprescription of medication and over–referral of patients to secondary care specialists relative to the norm. Although individual compensation varies by 50 percent, overall health spending is generally within 3 percent of the budget target.
Although there might be economically sound reasons to structure health care financing in this manner as discussed in section IV, the implication of the arrangement is that the funding mechanism limits the scope to reduce health care spending in the short term on a discretionary basis. This problem points to a potential tradeoff between greater budget flexibility and efficiency in some circumstances.
The social agreement approach to collective bargaining is not without benefits as the previous agreement restrained real wages below productivity growth to facilitate a smooth adoption of the euro.
Compression of capital spending can lead to under–investment in infrastructure and hinder medium–term growth (see Public Investment and Fiscal Policy—Lessons from the Pilot Studies, IMF, 2005).
The input–and output–based efficiency scores are equal assuming constant returns to scale. The DEA models in this chapter permit variable returns to scale given the sharp decrease in outcomes at higher spending levels. See Zhu (2003) for a detailed technical treatment of the DEA approach.
For instance, differences in geography could affect the efficiency of motorway investment as a mountainous country could spend more per kilometer while still operating efficiently. Similarly, countries with higher initial GDP per capita levels tend to have better technology and stronger initial education and health outcomes.
The maternal mortality rate is measured per 100,000 births. There are only about 18,000 births each year in Slovenia. As a result, a single outlier could result in sharp swings.
As the cost of voluntary health insurance for co–payments currently depends only on earnings rather than risk characteristics such as age and lifestyle, the private system is comparable to charging a higher social contribution rate through the compulsory insurance system. This was also a conclusion of the 2003 white paper on health care reform. Private insurers also face moral hazard, adverse selection and higher administrative costs compared to the mandatory insurance fund. This explains the need for a complex risk–adjustment mechanism that compensates private insurers for the risk attributes of their customers. For instance, the current rate structure pools risk so that younger workers subsidize older beneficiaries. However, companies with younger customers on average earn greater profits under this pooled–risk system, which requires compensating transfers between insurance companies.
The pupil–teacher ratio is a proxy for an outcome indicator, such as quality or effectiveness of primary education.
Based on the U.S. Department of Education’s Trends in Mathematics and Science Study (TIMSS)
The NM–8 countries with available TIMSS scores include Estonia, Hungary, Latvia and the Slovak Republic.
With about 900 schools, educational facilities represent about half of all public sector institutions.
Secondary schools are more advanced in this direction, as they are more firmly under central government control.
The outcome indicator is calculated by comparing the proportion of the population at risk of poverty before and after social protection transfers.
Income is defined as market earnings, pensions and nongovernment receipts, such as gifts and property sales. Transfers include social and unemployment benefits.
Both Eurostat and IMF Government Finance Statistics are used as the Eurostat database provides data by economic classification while the IMF database provides data by functional classification. In years where the Eurostat and IMF data sets overlap, the two sources were cross–checked to ensure consistency.