The Macroeconomic Impact of Delayed Government Payments: A Case Study 1

Abstract

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.