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International Futures Help System

Government Expenditures

The pre-processor computes initial conditions for the expenditure streams and fills holes in data as necessary. Hughes and Hossain (2003) discuss how it does so.

In future years the total of government expenditures is calculated from the sum of direct consumption and transfers. The two components, however, each require a moderately complex calculation.

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Consumption. Computation of government consumption (direct expenditures on the military, education, health, R&D, foreign aid, and other categories) begins with use of the function to compute an estimated government consumption (EstGovtConsum) as a portion of GDP, using GDP per capita (PPP) as the driver. The initialization discussion above showed the empirical base of that function. It carries a behavioral assumption of generally increasing expenditures with increases in GDP per capita.

The estimated value then enters a convergence calculation that IFs uses in a number of instances. In the first year a ratio term (GovConR) was computed that represented the degree to which a country’s consumption/GDP differed from the estimated value. That ratio multiplies the estimated term in future years, allowing the function normally to increase consumption/GDP as GDP per capita rises. At the same time, such divergence from estimated functions is almost as often a matter of data inadequacy or of temporary factors for a country as it is of persistent idiosyncrasy. The convergence function allows the country/region’s value to converge towards the functional calculation over a period of time (govfinconv), usually quite long. Such convergence also helps avoid ceiling effects (e.g. government consumption as 100% of GDP) as GDP per capita rises.

The second term in the equation below is called the Wagner term, after the discoverer of the long-term behavioral tendency for government consumption to rise as a share of GDP, even at stabile levels of GDP per capita. This is built into the consumption calculation through an exogenous parameter (wagnerc) that is multiplied by the number of the forecast year.

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Almost finally, government consumption is further modified by an exogenous multiplier of government expenditures, allowing the user to directly control it by country/region and by an endogenously computed multiplier on expenditures that, parallel to MulRev, reflects the balance or imbalance in government expenditures and the debt level. Finally, and not shown, there is a simple adjustment to reflect the affect that changing levels of foreign assistance receipts can have on consumption.

The division of government expenditures into target destination categories (GDS), part of the broader socio-political module of IFs is described in the Help system of the model. That division is, of course, also a key agent-class behavior. With respect to sector of origin for government consumption (GS), which is information needed for the equilibration mechanism in the core commodities module, IFs simplistically assumes in the pre-processor that all government spending except arms, which has its source in manufactures, comes from services. On a year to year basis, the sectors of origin remained fixed at the initial proportions.

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Transfers. Government transfers, as distinguished from direct consumption expenditures, are computed using two different behavioral logics, a top-down one like the one for government consumption, and a bottom-up logic. The bottom-up logic is especially important in the analysis of pensions, because it is responsive to the changing size of the elderly population.

The top-down logic again uses an aggregate function responsive to changes in GDP per capita.

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The top-down logic also computes an estimate of pension expenditures using a function estimated cross-sectionally, multiplying that by the ratio of empirical/estimated values computed in the first year.

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The bottom-up logic looks at the number of people above age 65, and multiplies that number by per capita pension benefits in the first year, adjusted for the increase in GDP per capita. Ideally, this calculation should be adjusted for changing retirement ages, which are becoming younger and thereby further increasing pressure for pensions.

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The larger of the two numbers indicates the total pressure in the system for public pensions.

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The bottom-up calculation of welfare transfers is parallel to that for pensions.

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The two transfer pressures are summed and compared with the total, top-down estimate of transfers, with the maximum of the two terms used as total transfers.

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A proportionate share of the total transfers constitutes pensions, and welfare transfers are the residual.

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The split to unskilled and skilled households can be affected in subsequent years by exogenous multipliers (default values of multipliers are typically "1").

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