We analyze the impact of a drastic reduction in delayed governments ' payments on private sector activity. We focus on the case of Spain, a country in which a number of policy reforms were implemented to cope with increasing regional and local government payment periods and trade debt. Most noticeably, over 2012-2014 the Spanish central government approved various extraordinary mechanisms for the payment of local and regional government suppliers which have significantly reduced the stock of trade debt and the average supplier payment period of these levels of government. Successive plans have made it possible to unblock payments and channel funds of close to 7% of GDP to the private sector in somewhat less than three years, in a period of economic weakness, fiscal consolidation and tight credit. We explore the variety of channels on which plans of this type may operate through the lens of a macroeconomic model, and present empirical estimates of a positive impact of such policy measures on economic activity.
Keywords: Delays in public payments; Trade credits; Accounts payable, Government spending.
The recent economic crisis has had a most adverse effect on public finances in a number of EU countries, with a significant increase in the budget deficit and public debt (see e.g. Bird and Mandilaras, 2013). One phenomenon associated with this deterioration in public finances has been the significant increase in the time taken by governments to pay its suppliers and, therefore, in its trade debt (Flynn and Pessoa, 2014). In some countries, public sector trade debt doubled over the initial few years of the crisis, reaching unprecedented levels. Nevertheless, surprisingly enough, the issue of the macroeco-nomic impact of government trade debt and arrears on private sector activity has received very limited attention in the literature (see Checherita-Westphal et al., 2015). (2)
The recent experience of Spanish public finances poses a natural example to study the impact of government trade debt on the economy. The total amount of consolidated Spanish general government payment obligations outstanding increased to [euro]87.3 billion in 2011 (8.1% of GDP) from [euro]57.1 billion in 2007 (5.3% of GDP). As of 2012, the Spanish government adopted various measures geared to reducing (local and regional) government trade debt volumes. At the same time new regulations, aimed at structurally reducing the payment time, were approved. These policies have had a significant impact on the stock of trade debt and the average supplier payment period. Hence, the consolidated general government payment obligations outstanding in 2015 stood at [euro]57.2 billion (5.3% of GDP), significantly down on the 2011 figure.
These developments in general government trade credit in Spain may have exerted significant effects on economic activity. While deferred payment is a standard practice in trade relations, an excessive lengthening of the payment period may have harmful effects on creditor companies. In a time of financial constraint, these firms may not be able to find alternative sources of financing or find them but at a not affordable cost. Therefore, the trade debt-reducing measures implemented may have lessened financial constraints insofar as they entailed an injection of liquidity for households and firms. The aim of this paper is to describe the extraordinary mechanisms for payments to suppliers developed in Spain in recent years and to quantify their impact.
The paper is structured as follows. Section 2 briefly describes the trend of general government accounts payable in Spain and in other European countries. Section 3 reviews the various policies implemented to reduce both the stock of trade debt and general government payment periods in Spain. Section 4 looks at the main channels through which these policies might exert an influence on the economy's private sector, and the potential effects are quantified using two analytical instruments. First, a purely data-based VAR model, estimated over the period 1995Q1-2015Q4. Second, an estimated, large-scale macroeconometric model for the Spanish economy that allows for a discussion and quantification of the impact of various theoretical channels. Section 5 draws the main conclusions of our study.
GOVERNMENT ACCOUNTS PAYABLE IN SPAIN: RECENT TRENDS AND POLICY MEASURES
2.1 GENERAL GOVERNMENT ACCOUNTS PAYABLE FROM AN EUROPEAN PERSPECTIVE
The general government sector commonly uses private suppliers to provide public goods and services, and in doing so it incurs payment obligations with them under certain conditions. These payments are not usually fulfilled contemporaneously. The amounts of the deferred payments are statistically recorded in what are known as "accounts payable". (3) This trade debt forms part of total general government liabilities.
From 1999 to 2007, in the upturn prior to the economic crisis, consolidated accounts payable stood in Spain at around 4% of GDP, or 10% of total public expenditure in annual average terms. In comparative terms (see Figure 1), this figure was slightly below the average for other European countries, which nonetheless show high heterogeneity, ranging from practically zero in Germany to percentages of around 10% of GDP in France.
In terms of agents, most outstanding payment obligations in Spain's case were concentrated in local and regional governments, which accounted for around 65% of such obligations in the 1999-2007 period. By type of creditor, almost three-quarters of this debt was to non-financial corporations and the remainder to households.
A supplementary variable that allows for the analysis of the volume of outstanding obligations is the average supplier payment period. According to data based on surveys of firms4, the general government payment period differs substantially from one country to another (see Figure 2), both in relation to the usual contractual practices prevailing and to the average delays observed with respect to those practices. Prior to the crisis, the usual contractually stipulated general government payment period was around 80 days in the case of Spain and Italy, while it stood at 31 days in Germany and the United Kingdom. According to the surveys, payment delays in relation to contractual commitments were especially high in Portugal and Italy, where they exceeded 80 and 60 days, respectively. In Spain's case, these delays stood at around 30 days on average prior to the crisis.
[FIGURE 1 OMITTED]
The stocks of outstanding payment obligations of most EU countries generally rose during the crisis. These increases were especially significant in Spain and particularly in Portugal and Greece. In the case of Spain, accounts payable reached 8% of GDP at end-2011. This increase affected all tiers of government. The increase was in payables to both firms and households. The average delays in payments relative to the contractually agreed period are estimated to have increased by approximately 30 days compared with those before the crisis.
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2.2 MEASURES TO REDUCE TRADE DEBT IN SPAIN
Several countries, including Spain, Italy and Portugal, implemented plans in 2011 and 2012 to reduce their general government...