Unproductive Public Expenditures
A Pragmatic Approach To Policy Analysis
Conclusions and Some Pragmatic Suggestions for Policy Formulation
Together with efforts to mobilize revenue, public expenditure policy is at the core of any successful effort to achieve efficient and equitable adjustment. Focusing only on revenue policy is not enough. Nor is it sufficient, even from a macroeconomic perspective, to focus only on the level of public expenditure. Public expenditure productivity has critical implications for fiscal adjustment, particularly as the competition for limited public resources intensifies. Public expenditure policy issues, including those relating to the efficiency of public expenditures and public expenditure composition, are vital for efficient and sustainable fiscal adjustment.
The following conclusions can be derived from the consideration of the economic implications of unproductive public expenditures.
- All countries can increase public expenditure productivity by improving both the efficiency of individual public programs and the composition of public programs. To this end, a systematic economic analysis of public sector production processes and public expenditures should support the formulation and execution of public expenditure policy. The present practice of public expenditure policy formulation and execution in many countries falls short of this goal.
- Assessing public expenditure productivity is complicated. In particular, it is difficult to avoid making value judgments. Nevertheless, the search for efficient means of achieving established objectives, to a considerable extent, does not require value judgments. Moreover, an assessment of the economic costs of achieving alternative objectives is necessary if a country is to resolve the difficult choices related to public expenditure composition and, more broadly, to assess the trade-offs related to the macroeconomic and structural implications of pursuing different objectives.
- In achieving public expenditure efficiency in the areas of military expenditures and producer subsidies, international cooperation is crucial.
- Proper public expenditure analysis requires proper statistical data. Ideally, the authorities should collect in a timely fashion the relevant comprehensive data on economic and functional expenditure components and subcomponents that encompass all proper public entities, including local governments and extrabudgetary institutions. In addition, data on expenditures in each functional category should be broken down into their economic components. Other types of data (for example, detailed social indicators) are also required for effective public expenditure policy analysis. The statistical data being collected now are far from adequate.
Some Pragmatic Suggestions for Policy Formulation
From the preceding analysis, it is possible to identify some practical steps for identifying unproductive expenditures and improving overall expenditure productivity. It should be noted that the steps enumerated below are by no means exhaustive. Rather, they are meant to illustrate to policymakers that simple yardsticks can yield economically meaningful results when, owing either to data or time constraints, or both, a comprehensive analysis is not possible.
- The policymaker should attempt to identify public sector outputs that can be provided or produced more efficiently by the private sector without compromising other possible objectives, such as an equitable distribution of income.
- The policymaker should examine whether the primary objective of the project or program is being met in the most cost-effective way. It is possible that the secondary objective dominates the primary objective. For instance, if the aim is to employ large amounts of labor in order to provide income support to the unemployed, it may be more efficient to include specific unemployment benefit programs for the poor in the budget instead of adding employment objectives to existing projects.
- White elephant projects or programs in both recurrent and capital components of the budget may be identified by focusing on big-ticket items, particularly the domestically financed ones. It is important to note, however, that small projects often escape close monitoring and thus can result in significant waste in the aggregate. Donor-financed projects or programs in many developing countries are more likely to have been subjected to cost-benefit analysis.
- The existence of generalized food or producer subsidies is indicative of the potential for savings in expenditures. Different schemes--along the lines discussed in the pamphlet--can be introduced to retain benefits in the short term in a form that is less expensive to the budget.
- A comparison of expenditure allocations under either functional or economic headings with countries at the same level of development and in the same region can be useful. A particularly high level of expenditure in one category could be symptomatic of expenditure inefficiencies. Similarly, changes in indices of the achievement of objectives, such as increasing literacy or declining mortality in relation to expenditures, may indicate the adequacy or efficiency of certain types of social expenditures, such as those on education or health.
- Budgetary allocations for different ministries or sectors in terms of wage and nonwage expenditures may provide an idea of expenditure productivity. Relatively low nonwage current expenditures, particularly in education and health sectors, are indicative of low expenditure productivity, as under these conditions schools will have an inadequate provision of books and other materials for teaching and hospitals will lack medical supplies. Some waste may exist when nonwage outlays are relatively large in a specific sector or ministry.
- Besides an assessment of the relative budgetary allocations for wage and nonwage outlays, an analysis of overall and sectoral employment, disaggregated by type of employee, can be useful. Many developing countries have a shortage of skilled manpower at the middle and higher levels of the civil service but have a large number of low-level employees ineffectively employed. Gradually reducing the number of low-level employees through attrition or specific separation schemes can help raise expenditure productivity.
- Inefficient expenditures may be found in the accounts of extrabudgetary funds or in the quasi-fiscal activities of the central bank. These expenditures should be made transparent and scrutinized for any unproductive outlays.