The impact of financial crises on social spending: Delving into the effects in developed and developing countries

Despite expecting countries to rely on welfare measures in the aftermath of financial crises, one should not ignore the possibility of fiscal retrenchments due to the constraints that those crises may bring. This paper analyses that issue by assessing the impact of financial crises on governmental social spending and its components (healthcare, education, and social protection) using a panel of 108 countries from 1991-2019. An important contribution of this study is that it assesses the effects of different types of financial crises (banking, currency, and debt) in addition to distinguishing between developed and developing countries. The findings indicate that while developed countries neutralise the adverse effects of crises by increasing social spending, developing countries tend to shrink outlays – in particular healthcare and social protection – when financial crises strike, despite the associated negative consequences on human and social wellbeing. Moreover, debt crises proved to be more detrimental to social spending than banking and currency crises in developing countries. An important policy implication arising from our analysis is that governments should maintain a high level of fiscal balance in normal times to be able to finance welfare state expansion programmes during periods of financial crises, especially in emerging/developing countries.