Public expenditure should reflect collective choices that emerge from the political process. It is possible to evaluate the economic consequences of these choices, and to make judgments about the extent to which the apparent objectives which underlie these choices are being achieved in the context of cost-effectiveness.
This can be done from three perspectives: the macroeconomic consequences, the allocation of resources within the economy; and the operational efficiency with which these choices are carried out.
High and rising public expenditure raise two key issues from a macroeconomic perspective. First, they pose financing problems that make it difficult to ensure fiscal discipline and this makes macroeconomic policy management difficult. Second, the distortions created by the tax burden required to meet government’s financing needs may carry high economic costs. Since the tax burden is largely driven by the overall level of government expenditure, this often impinges overall economic performance.
Government expenditure is also an important vehicle for implementing collective choices about resource allocation and income distribution. The motivation by government to intervene in the market include inter alia: the need to provide public goods; a view that merit goods, such as education and health, should be widely available; concern about income distribution; and the desire to limit the extent of monopoly power.
Intervention often involves a mix of expenditure, regulations, tax incentives, multipartite agreements and moral suasion.
However, expenditure is sometimes undertaken without an adequate assessment of its costs and impacts. This may be a reflection of inadequate evaluation systems in the policy formulation process. It may also reflect the tendency for benefits of policy action to create significant political constituencies while the costs are spread over a larger number of people.
It is in the best interest of a country to ensure that public expenditure is operationally efficient; that is, avoids waste. Unfortunately, there are many obstacles to achieving higher levels of operational efficiency. This is true particularly where bureaucratic structures have many layers, or responsibility for decision-making is highly centralised.
In addition, entrenched work and management habits, rigid seniority-based pay scales, and strong union power in the public service may operate to limit flexibility. Furthermore, the incentives for managers in public administration to enhance efficiency may be weak since efficiency gains risk leading to less, rather than more, resources being available to them or may not translate into improved pay or other advantages.
Against this backdrop the following questions can be asked:
(1) Are processes of evaluation and planning in place to ensure that public expenditure decisions are based on a realistic view of their cost and overall affordability?
(2) Is expenditure by lower levels of government adequately overseen?
(3) Is the government’s performance in achieving its public policy goals commensurate with the resources allocated to them?
(4) Is government intervention warranted in all areas where public expenditure is taking place?
(5) Can areas be identified where there is significant scope for efficiency gains?
I hope the Grenadian public will anxiously await answers to these questions and more in the ensuing months as the debates intensify leading up to the next budgetary presentations.
(Dr. Brian Francis, the former Permanent Secretary in the local Ministry of Finance, is a Senior Lecturer in the Department of Economics at the Cave Hill Campus in Bridgetown, Barbados of the University of the West Indies)