Stabilization Effects of Social Spending

The aim of this paper is to assess the ability of social spending to smooth output shocks and to provide stabilization. The results show that overall social spending is able to smooth about 16 percent of a shock to GDP. Among its subcategories, social spending devoted to Old Age and Unemployment are those that contribute more to provide smoothing. Moreover, the stabilization effects of social spending are significantly larger in those countries where the size of social spending is higher. The empirical results are economically and statistically significant and robust.