Public Expenditure and Growth

Given that public spending will have a positive impact on GDP if the benefits exceed the marginal cost of public funds, the present paper deals with measuring costs and benefits of public spending. The paper discusses one cost seldom considered in...

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Bibliographic Details
Main Author:	Herrera, Santiago
Format:	Policy Research Working Paper
Language:	English
Published:	World Bank, Washington, DC 2012
Subjects:	ABSENTEEISM ACCOUNTING ADMINISTRATIVE COSTS ADVERSE EFFECT AGGREGATE COST AGRICULTURAL OUTPUT ALLOCATION AMOUNT OF RISK AVERAGE GROWTH BANKS BENCHMARK BENCHMARKING BENCHMARKS BENEFICIARIES BENEFICIARY BENEFITS OF PUBLIC SPENDING BUDGET CONSTRAINT BUSINESS CYCLE CALCULATION CALCULATIONS CAPITAL ACCOUNT CAPITAL ACCUMULATION CAPITAL EXPENDITURES CAPITAL FORMATION CAPITAL SPENDING CAPITAL STOCK CAPITAL STOCKS CASH TRANSFER CD CENTRAL BANKS CENTRAL BUDGET CENTRAL BUDGET OFFICE CENTRAL GOVERNMENT COMPLIANCE COSTS COMPOSITION OF PUBLIC SPENDING CONSUMERS CONSUMPTION EXPENDITURE CONSUMPTION TAXES CONTINGENT LIABILITIES CONTRACTUAL ARRANGEMENTS COST INCREASES COST-BENEFIT ANALYSIS CURRENT PRICES CUT SPENDING DATA AVAILABILITY DEGREE OF RISK DEVELOPING COUNTRIES DEVELOPMENT ECONOMICS DISCOUNT RATE DISCOUNT RATES EARNINGS ECONOMIC ACTIVITY ECONOMIC ANALYSIS ECONOMIC DEVELOPMENT ECONOMIC EFFICIENCY ECONOMIC GROWTH ECONOMIC RATE OF RETURN ECONOMIC UNCERTAINTY EDUCATION SPENDING EDUCATIONAL ATTAINMENT EDUCATIONAL PROGRAM EFFECTIVENESS OF PUBLIC SPENDING EFFICIENCY OF PUBLIC SPENDING EFFICIENCY OF RESOURCE USE ELASTICITY ELECTRICITY EQUILIBRIUM EXCHANGE RATE EXPENDITURE GROWTH EXPENDITURE PROGRAMS EXPORT PERFORMANCE FINANCES FINANCIAL MARKETS FISCAL MANAGEMENT FISCAL POLICY FISCAL POSITIONS FLOATING EXCHANGE RATE GDP GDP PER CAPITA GOVERNMENT CONSUMPTION GOVERNMENT CONSUMPTION EXPENDITURE GOVERNMENT EXPENDITURE GOVERNMENT SPENDING GROWTH RATE HEALTH OUTCOMES HEALTH PROGRAMS HIGHER EXPENDITURE HOUSEHOLD FINANCES HOUSING HOUSING PRICES HUMAN CAPITAL INCOME INCOME DISTRIBUTION INCOME EFFECT INCOME GROUP INCOME GROUPS INCOME LEVEL INCOME TAXES INCOMES INCREASE IN INCOME INDEBTED COUNTRIES INDEXATION INEFFICIENCY INFRASTRUCTURE DEVELOPMENT INFRASTRUCTURE PROJECTS INSTITUTIONAL CAPACITY INSTRUMENT INTERNATIONAL BANK INVENTORY INVESTMENT PROJECTS INVESTMENT SPENDING LABOR FORCE LABOR MARKET LITERACY LOAN LOCAL GOVERNMENTS LOCAL NEWSPAPERS LOW INCOME LOWER INCOME MACROECONOMIC ENVIRONMENT MACROECONOMICS MARGINAL COST MARGINAL PRODUCT MARGINAL TAX RATE MARKET FAILURES MARKET FORCES MATH MIDDLE INCOME COUNTRIES MONETARY POLICY MONETARY UNION MONETARY UNIONS NATIONAL BUDGET PARTIAL EQUILIBRIUM ANALYSIS PENSION PENSION BENEFITS PERMANENT INCOME PERMANENT INCOME HYPOTHESIS POLITICAL ECONOMY PORTFOLIO POVERTY RATES PRESENT VALUE PRICE CHANGES PRIMARY EDUCATION PRIVATE CAPITAL PRIVATE CONSUMPTION PRIVATE INVESTMENT PRIVATE SECTOR PRIVATE SECTOR PARTICIPATION PROBABILITY PRODUCTION FUNCTION PRODUCTION INPUTS PRODUCTIVE ASSETS PRODUCTIVITIES PRODUCTIVITY PRODUCTIVITY GROWTH PRODUCTIVITY INCREASES PROGRAM EVALUATIONS PROVISION OF GOODS PUBLIC PUBLIC BUDGETING PUBLIC BUDGETS PUBLIC CAPITAL PUBLIC CONSUMPTION PUBLIC DEBT PUBLIC DEBT MANAGEMENT PUBLIC EXPENDITURE PUBLIC EXPENDITURE MANAGEMENT PUBLIC FINANCES PUBLIC FUNDS PUBLIC INVESTMENT PUBLIC INVESTMENT IN INFRASTRUCTURE PUBLIC REVENUE PUBLIC SCHOOLS PUBLIC SECTOR PUBLIC SECTORS PUBLIC SERVICE PUBLIC SPENDING PUBLIC TRANSPORT RATE OF RETURN RATES OF RETURN RECURRENT COST RECURRENT COSTS RECURRENT EXPENDITURES RENTS RETURNS RISK AVERSE RISK AVERSION RISK TOLERANCE ROADS RULE OF LAW SALES SAVINGS SECONDARY SCHOOL SECONDARY SCHOOLS SIDE EFFECTS SOCIAL BENEFIT STAKEHOLDER STAKEHOLDERS STOCKS STREETS SUBSTITUTION EFFECT TAX TAX COLLECTIONS TAX RATE TAX REVENUE TAX SYSTEM TAXATION TOTAL FACTOR PRODUCTIVITY TOTAL WELFARE COST TRADE POLICY TRADING TRADING SYSTEM TRANSITION ECONOMIES TREASURY USER CHARGES UTILITIES VOUCHER PROGRAM VOUCHER PROGRAMS WAGE WAGE EXPENDITURES WEALTH WELFARE LOSS WORTH
Online Access:	http://documents.worldbank.org/curated/en/2007/10/8466839/public-expenditure-growth http://hdl.handle.net/10986/7366

Description
Summary:	Given that public spending will have a positive impact on GDP if the benefits exceed the marginal cost of public funds, the present paper deals with measuring costs and benefits of public spending. The paper discusses one cost seldom considered in the literature and in policy debates, namely, the volatility derived from additional public spending. The paper identifies a relationship between public spending volatility and consumption volatility, which implies a direct welfare loss to society. This loss is substantial in developing countries, estimated at 8 percent of consumption. If welfare losses due to volatility are this sizeable, then measuring the benefits of public spending is critical. Gauging benefits based on macro aggregate data requires three caveats: a) considering of the impact of the funding (taxation) required for the additional public spending; b) differentiating between investment and capital formation; c) allowing for heterogeneous response of output to different types of capital and differences in network development. It is essential to go beyond country-specificity to project-level evaluation of the benefits and costs of public projects. From the micro viewpoint, the rate of return of a project must exceed the marginal cost of public funds, determined by tax levels and structure. Credible evaluations require microeconomic evidence and careful specification of counterfactuals. On this, the impact evaluation literature and methods play a critical role. From individual project evaluation, the analyst must contemplate the general equilibrium impacts. In general, the paper advocates for project evaluation as a central piece of any development platform. By increasing the efficiency of public spending, the government can permanently increase the rate of productivity growth and, hence, affect the growth rate of GDP.

Public Expenditure and Growth

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