Do governments go Christmas shopping?

By Kristjan Piilmann, Alexander Plekhanov and Muzaffar Ahunov

Pre-Christmas spikes in consumer spending are a well observed phenomenon in EBRD countries and elsewhere. But so is the considerable “deadweight loss” related to Christmas shopping. This is because on average people value presents 10-30 per cent below their face value.

However, it is also likely that in addition to boosting GDP in the short term, giving Christmas presents has the unquantifiable side effect of making people happy. And the extra productivity of happy people might in fact offset the “deadweight loss”.

It turns out that consumers are not the only ones doing year-end “shopping”. A majority of EBRD countries display sharp spikes in government spending in December. On average, governments in EBRD countries for which data are available spend on a monthly basis 76 per cent more in December than between January and November.

Do governments really go on Christmas shopping sprees or are there other explanations of this pattern? It may, for example, be customary for governments to pay bonuses in December, often amounting to a month’s pay (the so-called 13th salary).

However, the IMF has estimated the average share of wages in total government expenditure at less than 15 per cent. Bonuses would thus explain only one fifth, perhaps two fifths, of the December spending spike.

December spending spikes might also be related to the uncertainty about tax collection during each fiscal year. Authorities never know with certainty how much revenue they will raise until the end of the fiscal year so they might start the year with a conservative spending strategy to avoid shortages of funds later. But as the budgetary year progresses, governments have a more accurate forecast for that year’s revenue so they can start spending without worrying about running out of cash later.

Civil servants might even have an incentive to spend as much as possible in December because if not all of the allowance is used, they risk budget reductions for the next twelve months. This would apply to any last month of the fiscal year. In Egypt, where the fiscal year ends in June, spending in that month is more than twice the average monthly spending during the rest of the year.

Looking at the composition of government expenditure in Estonia gives further insights into the year-end spikes. While there are no significant changes between December and rest of the year in crucial outlays, such as social security, education, culture and healthcare, discretionary spending, such as economic investments, military spending and general governance expenses, tend to be delayed until total revenues become more certain.

Is this an efficient way of spending public funds? Perhaps not – it is likely that projects rushed through in December may result in less efficient allocation of funds than measured spending during the year. Indeed, neither Finland nor the United States have spending spikes at the end of the fiscal year. In the EBRD region, Poland stands out as spike-free.

Interestingly, there seems to be a correlation between government effectiveness and the size of the December spikes: countries assessed as having lower government effectiveness according to the World Bank Governance Indicators tend to have higher spending increases at the end of the year. This may be related to both quality of budgeting and revenue forecasts as well as transparency and quality of budget spending.

So it seems that, very much like consumers, most governments in the EBRD region go Christmas shopping – especially in countries with lower perceived government effectiveness.

As with consumers, some of the extra spending in December is associated with a “deadweight loss”. But when it comes to spending taxpayers’ money, rather than personal income, such a deadweight loss is perhaps harder to justify.