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AbstractThis paper considers the impact of changes in governments' payment discipline on the private sector. We argue that increased delays in public payments can affect private sector liquidity and profits and hence ultimately economic growth. We test this prediction empirically for European Union countries using two complementary approaches. First, we use annual panel data, including a newly constructed proxy for government arrears. Using panel data techniques, including methods that allow for endogeneity, we find that payment delays and to some extent estimated arrears lead to a higher likelihood of bankruptcy, lower profits, and lower economic growth. While this approach allows a broad set of variables to be included, it restricts the number of time periods. We therefore complement it with a Bayesian VAR approach on quarterly data for selected countries faced with significant payment delays. With this second approach, we also find that the likelihood of bankruptcies rises when the governments increase the average payment period.
JEL Classification Numbers: E6, H6, H8Keywords: Public Payment Delays, Government Arrears, Accounts Payable, Government Spending.
ECB Working Paper 1771, March 2015 1
Non-Technical SummaryThe issue of government arrears has gained prominence during the European sovereign debt crisis. Particularly in EU/IMF programme countries -both in and outside the euro area -but also in other fiscally vulnerable economies, such as Italy and Spain, the identified amounts were considerable and measures to reduce the stock of arrears featured prominently in government strategies and as programme targets.To the best of our knowledge, this is the first paper to systematically address and econometrically estimate the economic impact of public spending delays and arrears. Our key contributions are twofold. First, we put forward a statistical measure that can serve as a proxy for arrears. Second, we use this and other measures of payment delays to gauge the short-term effect on some key economic variables.Our empirical results from annual panel data across the EU-27 countries suggest that payment delays may reduce profits, increase the likelihood of bankruptcies and, ultimately, slow economic growth. While the exact size of such effects is hard to estimate from the available data, results are significant in most specifications. On average for the European Union sample, the total amount of outstanding payment...