Myths and Facts about Fiscal Discretion: A New Measure of Discretionary Expenditure

In this paper we suggest a new measure of discretionary government spending for OECD countries over the period 1980-2011. To identify the components of discretionary expenditure, we use the volatility and persistence properties of the expenditure series. Discretionary policy cannot be inertial and should be free from prior obligations. Commonly used measures of discretionary fiscal policy do not satisfy these two criteria. We find that discretionary expenditure accounts on average for about 30 percent of total primary expenditure, suggesting that most government spending is driven by inertial and automatic components. These features help explain why government expenditure is generally not counter-cyclical even in advanced economies. Furthermore, the small share of discretionary expenditure over total expenditure significantly reduces the room of manoeuvre for counter-cyclical fiscal policy during recessions.