Public expenditure
Overview
Definitions
Public expenditure may be understood as spending by central (federal), state and local governments and by the public corporations, or simply as spending by the public sector.
(For statistical purposes, however, those terms are open to differing interpretations, and to promote comparability in the construction of national accounts, the OECD has published the following definitions[1]
- The public sector comprises the general government sector plus all public corporations including the central bank.
- The government sector consists of the following resident institutional units: all units of central, state or local government; all social security funds at each level of government; all non-market non-profit institutions that are controlled and financed by government units.
- The general government sector consists of the totality of institutional units which, in addition to fulfilling their political responsibilities and their role of economic regulation, produce principally non-market services (possibly goods) for individual or collective consumption and redistribute income and wealth.)
Categorisation
The principal categories of public expenditure are:
- government investment,
- government consumption,
- transfer payments
The effects of public spending
Social effects
Social justice
It is generally accepted that public expenditure can have a major influence upon social justice, but there is no consensus concerning the operational meaning of that term. The utilitarian criterion of welfare maximisation proposed by Jeremy Bentham [2] is implicit in the widespread application of cost/benefit criteria to investment and consumption expenditure, but it is held not to be applicable to transfer payments because it has implications for income distribution that could have damaging effects upon motivation. The philosopher John Rawls claims to meet that objection by requiring only that there should be no more inequality than would be required for the benefit of the least well off [3], but the political philosopher Will Kymlicka argues that that, too, could have averse motivational consequences[4]. The legal philosopher Ronald Dworkin proposes the adoption of an "equality of resources" criterion[5], and the eminent economist Amartya Sen proposed instead the criterion of "equality of capability"[6], but the libertarian philosopher Robert Nozick rejects the entire concept of redistribution on the grounds that it would infringe every person's inalienable right to benefit from the employment of the talents with which he is endowed[7].
Those differences in interpretation are reflected in international variations in income distribution as indicated by a comparison of Gini indexes, which indicates a tendency toward less inequality in Europe than elsewhere (see the tutorials subpage).
Freedom of choice
Public expenditure can be thought of as the expression of the transfer of freedom of choice from individuals to government. The concept of a political system under which the people delegate powers to the state on condition that it uses those powers in their interest was put forward in the 17th century by John Locke [8], and the actions to be undertaken in the exercise of those delegated powers were described by Adam Smith in the 18th century as "erecting or maintaining those public institutions and those public works, which, although they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could not repay the expense to any individual or small number of individuals, and which it therefore cannot be expected that any individual or small number of individuals should erect or maintain."[9]. The concept was further developed in the 19th century by John Stuart Mill, who termed it "Representative Government" [10].
Economic effects
Crowding-out and crowding-in
Under normal circumstances, private sector spending on government bonds is to some extent at the expense of spending on private sector bonds, with the consequence that some private-sector investment is "crowded out". To the extent that government bonds are used to finance consumption rather than investment, the total of the country's investment is diminished, leading in time to a loss of potential output. Crowding-out is seldom complete, however, but depends upon a range of factors including elasticities of demand for investment and for money [11]. During a recession, crowding-out may to some extent be offset by "crowding-in" as government spending makes up for the deficiency in private sector spending, leading to a recovery of demand and an increase in private-sector investment. The balance between crowding out under particular circumstances is a matter of controversy [12] .
Growth
Notes and references
- ↑ Glossary of Statistical Terms, OECD, 2009
- ↑ Jeremy Bentham: An Introduction to the Principles of Morals and Legislation, Oxford University Press, 1970
- ↑ John Rawls: A Theory of Justice, Harvard University Press, 1971
- ↑ Will Kymlicka: Contemporary Political Philosophy, Clarendon Press, 1989
- ↑ Ronald Dworkin: Sovereign Virtue, Harvard University Press, 2002
- ↑ Amartya Sen: The Idea of Justice, Alan Lane, 2009
- ↑ Robert Nozick: Anarchy, State and Utopia, Basic Books, 1974
- ↑ John Locke On Civil Government
- ↑ Adam Smith: An Inquiry into the Nature And Causes of the Wealth of Nations, Book 5, Chapter 1, Part 3, (first published 1776)
- ↑ John Stuart Mill Representative Government
- ↑ See Frederick Fourie: How to Think and Reason in Economics, Juta 2001
- ↑ See "The Crowding-out Controversy" on page 248 of William Baumol and Alan Blinder: Economics, Principles and Policy, Harcourt Bruce Jovanovich, 1979
- ↑ Oscar Alfeanca and Miguel-Angel Galindo:Public Expenditure, Income Distribution, and Growth in OECD Countries, International Advances in Economics, May 2003