## CHAPTER 1 Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth

## Source details

**Canonical URL:** [CHAPTER 1 Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth](https://www.imf.org/-/media/files/publications/fiscal-monitor/2025/october/english/ch1.pdf)

## Other formats

- [Markdown version](/-/media/files/publications/fiscal-monitor/2025/october/english/ch1.pdf.md)
- [Structured JSON version](/-/media/files/publications/fiscal-monitor/2025/october/english/ch1.pdf.json)

---

### Context and objectives
- Economic growth has remained persistently subdued since the COVID-19 pandemic, with growth in labor productivity having slowed in about 70 percent of economies (April 2025 World Economic Outlook, Chapter 1).
- Public finances face substantial strains from elevated and rising debt levels and increased demands for spending on defense, aging populations, and economic development. Low-income developing countries are also bracing for a reduction in foreign aid (April 2025 Fiscal Monitor, Chapter 1).
- The constrained fiscal environment requires governments to deliver greater value for money and strategically adjust expenditures within a fixed total spending envelope to support economic growth.
- The chapter focuses on:
  - Technical efficiency: maximizing output for a given level of resource use across broad expenditure categories.
  - Allocative efficiency: assigning priorities to spending items and directing resources toward programs that promote growth.

### Key questions addressed
- How have the composition and efficiency of public spending evolved over time, and how do they compare across country groups? What are the “efficiency gaps” relative to the most efficient countries?
- What factors, including policies and institutions, influence spending efficiency and composition? Does the degree of “rigidity” of public spending hinder the ability to adjust spending for growth and efficiency?
- If countries close efficiency gaps, how much could output increase in the medium to long term? Do pro-growth reallocations within a fixed spending envelope yield greater benefits in countries with higher spending efficiency? What mechanisms drive the output impact?

### Main findings (empirical and model-based)
- Current allocations do not effectively promote growth:
  - Public investment has declined globally to 18 percent of total expenditure.
  - Public education spending in total expenditure has remained modest at about 11 percent.
  - Public wage bills account for about one-quarter of total expenditure.
- Efficiency gaps and potential gains:
  - Efficiency gaps persist at about 31 percent in advanced economies, 34 percent in emerging markets, and 39 percent in low-income developing countries.
  - These gaps imply that countries could get 30 to 40 percent more value for money by adopting best performers’ practices.
  - Gaps are particularly pronounced in public spending on investment and research and development (R&D).
- Institutional correlates:
  - Lower levels of corruption, stronger rule of law, and more effective public investment management correlate with higher efficiency and lower spending rigidity.
  - Well-designed spending reviews often reduce public wage bills and increase spending efficiency.
- Reallocation impacts (holding total spending constant):
  - Increasing infrastructure investment by 1 percent of GDP is associated with an increase in output of about 1½ percent in advanced economies and 3½ percent in emerging market and developing economies over the long term.
  - Reallocating 1 percent of GDP from government consumption to public human capital can lift output by 3 percent in advanced economies and 6 percent in emerging market and developing economies.
- Closing efficiency gaps magnifies output gains:
  - Gradually closing gaps could lift output by a further 1½ percent in advanced economies and 2½ to 7½ percent in emerging market and developing economies over the long term.
  - Accelerating the closure of these gaps could further increase the gains in long-term output by 2 percent.
- Complementarities by country group:
  - Advanced economies: reallocating toward both R&D and human capital maximizes output gains.
  - Emerging market and developing economies: combining investment in human capital and infrastructure harnesses both short-term infrastructure gains and longer-term human capital benefits.

### Developments in public spending — stylized facts and rigidity
- Overall spending levels (2023):
  - General government spending reached 42 percent of GDP in advanced economies and 32 percent of GDP in emerging market economies.
  - In low-income developing countries, general government spending reached 18 percent of GDP.
- Shares allocated to growth-enhancing categories (2010–22 changes):
  - Public investment shares: from 1995–2009 to 2010–22, fell from 13 to 11 percent in advanced economies and from 22 to 20 percent in emerging markets (excluding China); stayed at 32 percent in low-income developing countries.
  - Combined public spending on health, education, and R&D averaged 32 percent of total spending in advanced economies, 24 percent in emerging markets, and 27 percent in low-income developing countries in 2010–22.
- Public wage bills and education spending:
  - Public wage bills account for about 25 percent of total expenditure in advanced economies and 28 percent in emerging market and developing economies, on average.
  - Wages account for about 69 percent of public spending on education globally.
  - Public sector wage premiums average about 13 percent in emerging markets and 10 percent in low-income developing countries.
- Rigidity estimates (one-year autocorrelations over five-year rolling windows, average 2011–22):
  - Advanced economies: 0.33.
  - Emerging markets: 0.26.
  - Low-income developing countries: 0.29.
- Interpretation and patterns:
  - In advanced economies, approximately one-third of spending is unlikely to change in the short term.
  - Most rigid categories in advanced economies: health, education, social protection.
  - Most rigid categories in emerging markets: public investment and defense/public order.
  - Some countries reduced rigidity over time (examples in chapter: Canada, Estonia, Sweden) alongside stronger multiyear fiscal frameworks and performance-based budgeting.

### Efficiency of public spending — data, measurement, and gaps
- Dataset:
  - Novel global data set estimating public spending efficiency for 174 countries between 1980 and 2023, benchmarking investment, health, education, and R&D.
- Definition and measurement:
  - Efficiency: how effectively governments maximize outputs using a fixed level of inputs, measured against a “production possibility frontier” defined by best performers.
  - Inputs are five-year averages paired with standard outcome variables across sectors.
  - Outcomes used:
    - Investment: transport and telecommunications infrastructure measures and international survey assessments of infrastructure quality.
    - Health: life expectancy, numbers of hospital beds and doctors, immunization rates, among others.
    - Education: enrollment and completion rates, average years of schooling, literacy rates, pupil-to-teacher ratios.
    - R&D: patent applications, publications in scientific journals, citations, researchers.
- Methodology:
  - Stochastic frontier analysis to address statistical noise.
  - Country fixed effects to account for structural differences.
  - Model-averaging techniques to handle model uncertainty.
  - Multioutput distance functions for multidimensional outcomes.
  - Rigidity estimates (autocorrelation method) are positively correlated with other measures and do not require assumptions about which categories are most rigid.
- Sectoral average efficiency gaps (cross-country averages):
  - Investment efficiency gaps: about 38 percent in advanced economies, 42 percent in emerging markets, and 53 percent in low-income developing countries.
  - Health spending efficiency gaps: about 26 percent in advanced economies, 28 percent in emerging markets, and 32 percent in low-income developing countries.
  - Education spending efficiency gaps: about 27 percent in advanced economies, 32 percent in emerging markets, and 40 percent in low-income developing countries.
  - R&D: efficiency gaps are particularly pronounced; a handful of countries dominate patent applications and scientific publications.
- Trends:
  - Gaps have narrowed considerably over the past four decades.
  - Notable improvements: Bangladesh and Rwanda.
  - Recent average gaps in pro-growth spending: 31 percent in advanced economies, 34 percent in emerging markets, and 39 percent in low-income developing countries.

### Determinants of public spending efficiency and allocation
- Empirical approach:
  - Cross-country and panel regressions, complemented by Bayesian techniques, analyzing cyclical variables (elections, crises), structural factors (demographics, political ideology), and policy/institutional variables (spending rigidity, public investment management).
- Key determinants and magnitudes:
  - Macroeconomic conditions and sociodemographic factors are the most robust determinants of spending efficiency and allocation.
  - Institutional quality, governance, and fiscal institutions also play an important role.
  - Governance example: increasing control of corruption by one standard deviation is associated with an improvement in the efficiency of public education spending of 3.5 percentage points.
  - Public investment management: improving allocation effectiveness from the 25th percentile to the 75th percentile is associated with an increase in the efficiency of public investment of about 3 percentage points.
- Decentralization and spending reviews:
  - Greater decentralization of spending is associated with higher efficiency, especially in education and R&D, but can exacerbate deficit biases without strong fiscal rules and oversight.
  - Spending reviews are associated with improved efficiency in public investment and education by identifying savings and improving effectiveness.
- Spending rigidity and reallocation:
  - Higher degrees of spending rigidity hinder adjustments and are associated with a lower probability of major pro-growth spending episodes.
  - Average rigidity in the bottom quartile is 0.18 and in the top quartile 0.38.
  - Institutional improvements can help decrease spending rigidity.
- Reallocation and debt:
  - Lower levels of public debt are robustly associated with growth-enhancing spending allocations as debt-servicing costs consume less of the spending envelope.

### Lessons from country reform efforts (case studies)
- Togo (public investment management reforms since 2016):
  - Measures: clarified responsibilities, standardized project appraisal, integrated investment planning into multiyear budgets, improved monitoring and evaluation, multiyear PIP in 2018 with cost-benefit analyses requirement, program-based budgeting (2020–2024), procurement reform, expanded PIP to SOE investments.
  - Outcome: public investment efficiency gap declined by 5 percentage points between 2015 and 2023.
- United Kingdom (public financial management and mobilizing private funding):
  - Measures: Infrastructure and Projects Authority (established 2016), treasury strategic planning, National Wealth Fund (successor to UK Infrastructure Bank established in 2021), PIMA in 2022.
  - Outcome: more effective project selection, better cost control, closer alignment with national priorities.
- Rwanda (education reforms):
  - Reforms: Nine Year Basic Education (2006), One Laptop per Child Programme (2008), Twelve Year Basic Education (2012).
  - Outcomes: near-universal primary enrollment; large increases in lower- and upper-secondary enrollment; distribution of more than 200,000 laptops.
  - Efficiency gains: 8 percentage point increase in education spending efficiency between 2007 and 2011; 3 percentage points between 2013 and 2016.
- Bahrain (education reforms since mid-1970s):
  - Outcome: public education spending efficiency gap decreased by 12 percentage points between 1980 and 2000; literacy rate rose from 86 percent in 1980 to 100 percent in 2018.
- Croatia (health care reforms 2008–2011):
  - Outcome: efficiency of public spending on health increased by 1.5 percentage points.
- Serbia (reallocation and public investment management):
  - Context: public investment rose from about 12 percent of total expenditure in 2019 to 19 percent in 2024.
  - Measures: Serbia 2025 program; Public Investment Management Information System in 2023; supported by IMF Policy Coordination Instrument and technical assistance from EU and World Bank.
- Brazil (integrating social protection with education):
  - Bolsa Família (implemented 2003) required school attendance and health checkups.
  - Outcome: significantly increased school attendance among low-income children and reduced dropout rates.
  - Spending change: public education spending increased by about 3 percentage points of total expenditure between 2002 and 2008.
- Slovakia (spending reviews):
  - Launched Spending Review Project in 2016; conducted 19 reviews covering almost two-thirds of total public spending; identified potential savings of 7 percent of total expenditure.
  - A 2020 review proposed measures to contain the public wage bill, including reducing employment in general government and optimizing staffing in state-owned enterprises.

### A primer on public spending and economic growth (channels)
- Channels:
  - Public spending enhances production factors: physical capital (infrastructure) and human capital (education and health).
  - Public R&D adds to the knowledge base firms leverage to boost productivity.
  - Governments use subsidies, cofinancing, guarantees, and tax expenditures to stimulate investment in training and R&D.
  - Public procurement fosters development of new products.
  - Public investment can generate positive externalities where social returns exceed private returns.
  - Public spending can reallocate resources across firms to better align resources with firms’ productivities.
- Effectiveness depends on spending efficiency: higher efficiency in public investment and R&D amplifies contributions to capital and knowledge.

### Empirical analysis of spending reforms — episodes and impacts
- Definition of reform episode:
  - Any four-year period during which spending in a particular category increases in at least three of the years, with the increase in at least one year being 1.5 standard deviations or greater; episodes can last longer than four years.
- Episodes identified: about 700 episodes across 155 countries.
- Average changes during episodes:
  - Public investment increases by about 4 percentage points of total expenditure.
  - Health spending increases by 0.8 percentage point.
  - Education spending increases by 1.6 percentage points.
  - R&D spending increases by 0.1 percentage point.
- Funding of reallocations:
  - Major reallocations toward public investment and health tend to be funded by cuts to social protection and general public services (including administration, lawmaking, and debt servicing).
- Aggregate impacts:
  - Major increases in public investment within a fixed expenditure envelope are associated with statistically significant and economically large short- and long-term output effects.
  - Example: a major episode as observed in Korea in 1975 is followed by an increase in output of about 4 percent 10 years later.
- Firm-level impacts:
  - Average 12 percent increase in firms’ total factor productivity over five years accompanies episodes with greater allocations to public investment.
  - Productivity gains are broad based and larger among firms in sectors less exposed to international trade and firms with greater flexibility to scale up production.
- Time horizons and sectoral results:
  - First five years: public investment boosts output via demand effects.
  - Reallocations to R&D (example: Singapore in 2004) average about 3 percent output increase after five years and persist over 10 years.
  - Increased health spending is followed by increases in output of about 3 percent over 10 years via higher workforce productivity.
  - Increased public spending on education does not produce a detectable output response even after 10 years (benefits materialize once educated cohorts enter the labor force).
- Cumulative multipliers (implied):
  - About 0.5 for investment.
  - About 1.8 for health spending.

### Efficiency gaps and reform episodes — interaction effects
- Role of spending efficiency:
  - In the 10 years following reallocations toward public investment, output increases by about 8 percent in countries with relatively efficient public investment (efficiency of 75 percent).
  - Output responds minimally in countries with low investment efficiency (25 percent).
- Quantified effect of improving efficiency:
  - A 10 percentage point improvement in public investment efficiency can boost the output impact of reallocation toward public investment by 1.4 percentage points over a decade (example: moving from the efficiency level of Guyana to that of France).
- Caution on health spending:
  - In countries with large and inefficient health spending, cutting other productive expenditures to increase health spending can lead to increased waste.

### Long-term impact: theoretical model simulations
- Model features:
  - Two versions of a dynamic general equilibrium model calibrated for a typical advanced economy and a typical emerging market and developing economy.
  - Public infrastructure in production function; choice to invest time in education with public human capital investment raising productivity of education; public R&D fuels stock of innovations with gradual diffusion; inclusion of inefficiencies in public spending.
- Key simulation results for reallocations of 1 percent of GDP from government consumption to targeted spending:
  - Reallocating 1 percent of GDP to public investment in human capital:
    - Increases output by 3 percent in advanced economies over approximately 25 years.
    - Increases output by 6 percent in emerging market and developing economies over approximately 25 years.
  - Reallocating 1 percent of GDP to infrastructure investment:
    - Lifts output by 1½ percent in advanced economies over the long term.
    - Lifts output by 3½ percent in emerging market and developing economies over the long term.
  - Reallocating 1 percent of GDP to R&D in advanced economies:
    - Could boost output by 3 percent over the long term.
- Timing of gains:
  - Infrastructure gains can materialize within five years.
  - Human capital gains emerge after about 15 years.
- Impact of closing efficiency gaps:
  - Fully closing gaps in spending efficiency can increase the output impact by an additional 1½ percent in advanced economies.
  - In emerging market and developing economies, additional gains range from 2½ to 7½ percent when fully closing efficiency gaps.
  - Closing efficiency gaps over 15 rather than 25 years can boost output gains by up to 2 percent for emerging market and developing economies.
  - Example: reducing the gap in the efficiency of public investment in human capital from 40 percent to 10 percent can increase long-term output by 2.7 percent, compared with a 2.3 percent increase from reducing the gap from 30 percent to zero.
- Complementarities and diffusion:
  - Advanced economies gain more from reallocating toward a combination of R&D and education versus focusing exclusively on one area.
  - Improving diffusion of technology in the private sector augments gains from R&D spending (example policy instrument: public agencies to facilitate technology transfer).

### Policies for efficient, pro-growth public spending (practical recommendations)
- Strategic approach:
  - Avoid blanket spending cuts that indiscriminately reduce high- and low-quality programs and risk undermining essential services and long-term growth.
  - Prefer targeted measures that identify inefficiencies and reallocate resources toward high-priority investments that support long-term growth and stabilize public debt relative to income.
- Institutional and process recommendations:
  - Strengthen institutions and processes as foundational to spending efficiency.
  - Combat corruption through robust mechanisms and effective anticorruption agencies; example magnitude: 3.5 percentage point gain in education efficiency per one standard deviation improvement in control of corruption.
  - Increase transparency and accountability through budget publication and contract disclosure.
  - Improve public investment management: upgrade project appraisal and selection, use independent reviews, include maintenance funding, and establish clear responsibilities for asset monitoring.
  - Use spending reviews to identify savings and improve program effectiveness; embed reviews early in budget cycles and set concrete savings goals.
  - Consider decentralization where appropriate to align spending with local preferences, while maintaining fiscal rules and oversight.
  - Make procurement competitive, transparent, and aligned with budget priorities; emphasize value for money through life cycle costing and risk management.
  - Strengthen fiscal rules and extend planning horizons through multiyear budgeting; incorporate tax expenditures into medium-term frameworks and monitor extrabudgetary funds and contingent liabilities.
  - Reform pensions and wage bills prudently: link retirement ages to life expectancy, align public wages with private sector benchmarks, and audit payrolls to eliminate ghost workers.
  - Prioritize prevention in health to reduce costs and extend working lives.
  - Replace broad fuel subsidies with targeted support for vulnerable groups in oil exporters and sub-Saharan African countries.
  - Manage private sector involvement and public–private collaborations carefully to mitigate fiscal risks.
  - Strengthen procurement systems and multiyear fiscal planning when increasing defense outlays.

*International Monetary Fund | October 2025*

### Introduction

### ch1 - Introduction

### Context and objectives
- Economic growth has remained persistently subdued since the COVID-19 pandemic, with growth in labor productivity having slowed in about 70 percent of economies (April 2025 World Economic Outlook, Chapter 1).
- Public finances face substantial strains from elevated and rising debt levels and increased demands for spending on defense, aging populations, and economic development. Low-income developing countries are also bracing for a reduction in foreign aid (April 2025 Fiscal Monitor, Chapter 1).
- The constrained fiscal environment requires governments to deliver greater value for money and strategically adjust expenditures within a fixed total spending envelope to support economic growth.
- This chapter examines how changes in the composition and efficiency of public spending can lift economic growth by focusing on:
  - Technical efficiency: maximizing output for a given level of resource use across broad expenditure categories.
  - Allocative efficiency: assigning priorities to spending items and directing resources toward programs that promote growth.

### Key questions addressed
- How have the composition and efficiency of public spending evolved over time, and how do they compare across country groups? What are the “efficiency gaps” relative to the most efficient countries?
- What factors, including policies and institutions, influence spending efficiency and composition? Does the degree of “rigidity” of public spending hinder the ability to adjust spending for growth and efficiency?
- If countries close efficiency gaps, how much could output increase in the medium to long term? Do pro-growth reallocations within a fixed spending envelope yield greater benefits in countries with higher spending efficiency? What mechanisms drive the output impact?

### Main findings (empirical and model-based)
- Many countries can reallocate public spending toward areas that enhance economic growth. Current allocations do not effectively promote growth:
  - Public investment has declined globally to 18 percent of total expenditure.
  - Public education spending in total expenditure has remained modest at about 11 percent.
  - Public wage bills account for about one-quarter of total expenditure.
- Almost all countries can increase the efficiency of their public spending:
  - Efficiency gaps persist at about 31 percent in advanced economies, 34 percent in emerging markets, and 39 percent in low-income developing countries.
  - These gaps imply that countries could get 30 to 40 percent more value for money by adopting best performers’ practices.
  - Gaps are particularly pronounced in public spending on investment and research and development (R&D).
- Stronger institutional frameworks are associated with higher spending efficiency and more growth-favorable spending composition:
  - Lower levels of corruption, stronger rule of law, and more effective public investment management correlate with higher efficiency and lower spending rigidity.
  - Well-designed reviews of spending (systematic analyses of public expenditure to evaluate consistency with policy priorities and identify savings opportunities) can be effective to optimize spending; following reviews, countries often reduce public wage bills and increase spending efficiency.
- Reallocating public spending can deliver significant output gains (holding total spending constant):
  - Increasing infrastructure investment by 1 percent of GDP is associated with an increase in output of about 1½ percent in advanced economies and 3½ percent in emerging market and developing economies over the long term.
  - Reallocating 1 percent of GDP from government consumption to public human capital can lift output by 3 percent in advanced economies and 6 percent in emerging market and developing economies.
- Closing efficiency gaps magnifies output gains:
  - Gradually closing gaps could lift output by a further 1½ percent in advanced economies and 2½ to 7½ percent in emerging market and developing economies over the long term.
  - Accelerating the closure of these gaps could further increase the gains in long-term output by 2 percent.
- Complementary spending mixes differ by country group:
  - Advanced economies: reallocating toward both R&D and human capital maximizes output gains.
  - Emerging market and developing economies: combining investment in human capital and infrastructure harnesses both short-term infrastructure gains and longer-term human capital benefits.

### Developments in public spending — Stylized facts

Pro-growth public spending and overall levels
- Government expenditure has increased substantially since the 1960s:
  - General government spending reached 42 percent of GDP in advanced economies and 32 percent of GDP in emerging market economies in 2023.
  - In low-income developing countries, general government spending reached 18 percent of GDP in 2023.
- Shares allocated to categories that enhance productive capacity have declined or remained modest:
  - Public investment: From 1995–2009 to 2010–22, the public investment share fell from 13 to 11 percent in advanced economies and from 22 to 20 percent in emerging markets (excluding China); it stayed at 32 percent in low-income developing countries.
  - Combined public spending on health, education, and R&D averaged 32 percent of total spending in advanced economies, 24 percent in emerging markets, and 27 percent in low-income developing countries in 2010–22.
- Public wage bills represent a substantial portion of spending:
  - Public wage bills account for about 25 percent of total expenditure in advanced economies and 28 percent in emerging market and developing economies, on average.
  - Wages account for about 69 percent of public spending on education globally.
  - Public sector wage premiums average about 13 percent in emerging markets and 10 percent in low-income developing countries.

Rigidity in public spending
- The chapter introduces rigidity estimates for 151 countries between 2000 and 2022 using one-year autocorrelations over five-year rolling windows.
- Average rigidity, 2011–22:
  - Advanced economies: 0.33
  - Emerging markets: 0.26
  - Low-income developing countries: 0.29
- Interpretation: in advanced economies, approximately one-third of spending is unlikely to change in the short term.
- Rigidity is present across categories in advanced economies (most rigid: health, education, social protection); in emerging markets the most rigid are public investment and defense/public order.
- Some countries reduced rigidity over time (examples cited in chapter: Canada, Estonia, Sweden) in line with stronger multiyear fiscal frameworks and performance-based budgeting.

Efficiency of public spending — data and measurement
- The chapter introduces a novel global data set estimating public spending efficiency for 174 countries between 1980 and 2023, benchmarking spending on investment, health, education, and R&D.
- Definition: efficiency is how effectively governments maximize outputs (outcomes) using a fixed level of inputs (public expenditure), measured against a “production possibility frontier” defined by best performers.
- Inputs are five-year averages and are paired with standard outcome variables:
  - Investment outcomes: transport and telecommunications infrastructure measures and international survey assessments of infrastructure quality.
  - Health outcomes: life expectancy, numbers of hospital beds and doctors, immunization rates, among others.
  - Education outcomes: enrollment and completion rates, average years of schooling, literacy rates, pupil-to-teacher ratios.
  - R&D outcomes: patent applications, publications in scientific journals, citations, researchers.
- Methodological approaches and considerations:
  - The efficiency estimates address statistical noise using stochastic frontier analysis.
  - Country fixed effects account for structural differences (for example, level of development or extent of private spending).
  - Model uncertainty is handled through model-averaging techniques.
  - The multidimensionality of outcomes is accommodated using multioutput distance functions.
  - The rigidity estimates (autocorrelation method) are positively correlated with other measures in the literature and have the advantage of not requiring assumptions about which spending categories are the most rigid.

*International Monetary Fund | October 2025*

### Annex 1.2) and yield several insights.

### Annex 1.2) and yield several insights.

### Efficiency Gaps in Public Spending (Cross-country Averages and Patterns)
- Investment efficiency gaps have historically averaged about 38 percent in advanced economies, 42 percent in emerging markets, and 53 percent in low-income developing countries.
- Health spending efficiency gaps have averaged about 26 percent in advanced economies, 28 percent in emerging markets, and 32 percent in low-income developing countries.
- Education spending efficiency gaps average about 27 percent in advanced economies, 32 percent in emerging markets, and 40 percent in low-income developing countries.
- Efficiency gaps in public spending on R&D are particularly pronounced, with a handful of countries dominating patent applications and scientific publications.
- Regional patterns: Europe and the Americas have the lowest gaps in efficiency, on average, compared with other regions.
- Country examples:
  - Latvia and Slovenia achieve solid infrastructure outcomes despite below-average levels of public investment.
  - Central African Republic and South Sudan show large efficiency gaps in infrastructure even after adjusting for low spending, often linked to conflict, capacity constraints, and governance weaknesses.
- Methodology note: Efficiency gaps measure distances to the spending efficiency frontier and range from 0 (fully efficient) to 1 (fully inefficient). The frontier is estimated using stochastic frontier analysis.

### Trends over Time
- Gaps in the efficiency of public spending have narrowed considerably over the past four decades.
- Country instances of large improvements: Bangladesh and Rwanda have dramatically improved their efficiency in the past decade.
- Sectoral progress and limits:
  - Low-income developing countries have expanded access to basic infrastructure.
  - Advanced economies achieved wide mobile phone coverage without increasing public investment.
  - Increases in life expectancy have been broad-based.
  - Education expenditures per person have increased globally but substantively only in advanced economies.
  - Progress has recently stalled, especially in advanced economies, as health spending has increased.
- Recent average gaps in pro-growth spending: 31 percent in advanced economies, 34 percent in emerging markets, and 39 percent in low-income developing countries.

### Determinants of Public Spending Efficiency and Allocation
- Empirical approach: cross-country and panel regressions, complemented by Bayesian techniques, analyzing cyclical variables (elections, crises), structural factors (demographics, political ideology), and policy/institutional variables (spending rigidity, public investment management).
- Key findings:
  - Macroeconomic conditions and sociodemographic factors are the most robust determinants of spending efficiency and allocation.
  - Institutional quality, governance, and fiscal institutions also play an important role.
- Governance and institutions:
  - Stronger institutions (less corruption, stronger rule of law) are associated with greater efficiency in public spending on investment, education, and R&D.
  - Example magnitude: increasing control of corruption by one standard deviation (improving from 30 places below average to 30 places above average in cross-country ranking) is associated with an improvement in the efficiency of public education spending of 3.5 percentage points.
  - Fragility and conflict are associated with lower spending efficiency due to institutional weaknesses and damaged infrastructure.
- Public investment management:
  - Better management practices—especially resource allocation effectiveness—are linked to greater efficiency.
  - Example magnitude: improving allocation effectiveness from the 25th percentile to the 75th percentile is associated with an increase in the efficiency of public investment of about 3 percentage points.
  - Common weaknesses: project appraisal and selection, adequacy of maintenance funding, and monitoring of public assets.
- Decentralization:
  - Greater decentralization of spending is associated with higher efficiency, especially in education and R&D.
  - Decentralization is measured as the ratio of spending by subnational governments to general government spending.
  - Caveat: decentralization can exacerbate deficit biases without strong fiscal rules and oversight, and local capacities, coordination, and governance quality influence local spending efficiency.
- Spending reviews:
  - Spending reviews are associated with improved efficiency in public investment and education spending by identifying potential savings and improving effectiveness (e.g., addressing staffing redundancies and uncompetitive compensation).
- Reallocation and debt:
  - Composition of spending matters for allocative efficiency; reallocating toward pro-growth areas can yield significant benefits.
  - Stronger governance is associated with allocating more funds to growth-enhancing areas.
  - Lower levels of public debt are robustly associated with growth-enhancing spending allocations, as debt-servicing costs consume less of the spending envelope.
- Spending rigidity:
  - Higher degrees of spending rigidity hinder adjustments and are associated with a lower probability of major pro-growth spending episodes.
  - Average rigidity in the bottom quartile is 0.18 and in the top quartile 0.38.
  - Institutional improvements, such as better public investment management practices, can help decrease spending rigidity.

### Lessons from Country Reform Efforts (Case Studies and Outcomes)
- Overview: Case studies include Bahrain, Croatia, Rwanda, Togo, the United Kingdom (efficiency); Brazil, Serbia (reallocation); Slovak Republic (spending reviews). They underscore synergies in commitment, institutions, and reform.
- Togo (public investment management reforms since 2016):
  - Measures: clarified institutional responsibilities, standardized project appraisal, integrated investment planning into multiyear budgets, improved monitoring and evaluation, launched multiyear Public Investment Program (PIP) in 2018 with cost-benefit analyses requirement, transitioned to program-based budgeting between 2020 and 2024, reformed procurement, expanded PIP to include state-owned enterprise investments.
  - Outcome: public investment efficiency gap declined by 5 percentage points between 2015 and 2023.
  - Remaining challenges: public-private partnerships, evaluation, uneven implementation.
- United Kingdom (public financial management and mobilizing private funding):
  - Measures: strengthened oversight via Infrastructure and Projects Authority (established 2016), improved strategic planning through the treasury, National Wealth Fund (successor to UK Infrastructure Bank established in 2021) catalyzing private investment, PIMA in 2022 strengthened public investment framework.
  - Outcome: more effective project selection, better cost control, closer alignment with national priorities; strong institutional foundation across planning, allocation, implementation phases.
- Rwanda (education reforms):
  - Reforms: Nine Year Basic Education (2006), One Laptop per Child Programme (2008), Twelve Year Basic Education (2012).
  - Outcomes: near-universal primary enrollment, large increases in lower- and upper-secondary enrollment (especially among rural and disadvantaged children), distribution of more than 200,000 laptops (with challenges in teacher training and curriculum alignment).
  - Efficiency gains: 8 percentage point increase in education spending efficiency between 2007 and 2011; 3 percentage points between 2013 and 2016.
- Bahrain (education reforms since mid-1970s):
  - Focus: enhanced access to schools, improved teacher education.
  - Outcomes: public education spending efficiency gap decreased by 12 percentage points between 1980 and 2000; net primary and secondary enrollment rates exceptionally high; literacy rate rose from 86 percent in 1980 to 100 percent in 2018.
- Croatia (health care reforms 2008–2011):
  - Measures: increases in copayments, measures to resolve accumulated arrears, changes in payment mechanisms for primary and hospital care, reforms to pharmaceutical pricing and reimbursement, changes in provision (e.g., emergency care).
  - Outcome: efficiency of public spending on health increased by 1.5 percentage points.
- Serbia (reallocation and public investment management):
  - Context: public investment rose from about 12 percent of total expenditure in 2019 to 19 percent in 2024.
  - Measures: Serbia 2025 program (five-year) focused on roads, railways, health, sewerage, waste treatment; introduced Public Investment Management Information System in 2023; supported by IMF Policy Coordination Instrument and technical assistance from EU and World Bank.
- Brazil (integrating social protection with education):
  - Example: Bolsa Família conditional cash transfer program (implemented in 2003) required school attendance and health checkups for benefits.
  - Outcomes: significantly increased school attendance among low-income children, reduced dropout rates, increased demand for qualified teachers.
  - Spending change: public education spending increased by about 3 percentage points of total expenditure between 2002 and 2008.

### Policy Implications and Effective Practices (Synthesis)
- Strengthen institutions and governance to reduce corruption and enhance rule of law, which yields measurable efficiency gains (example: 3.5 percentage point gain in education efficiency per one standard deviation improvement in control of corruption).
- Improve public investment management, particularly project appraisal and selection, maintenance funding, and asset monitoring—moving from low to high allocation effectiveness can raise investment efficiency by about 3 percentage points.
- Use spending reviews to identify savings and improve program effectiveness, particularly in public investment and education.
- Consider decentralization where appropriate to better align spending with local preferences and encourage policy experimentation, while safeguarding fiscal rules and oversight.
- Reallocate spending toward pro-growth areas when possible; maintain lower public debt to preserve fiscal space for growth-enhancing allocations.
- Reduce spending rigidity through institutional reforms to enable timely and effective expenditure adjustments.

*Source: IMF staff estimates and chapter text from the IMF Fiscal Monitor chapter content provided.*

### Annex Figure 1.1.4).

### Annex Figure 1.1.4).

### Spending Reviews
- Slovakia launched the Spending Review Project in 2016 and has since conducted 19 spending reviews.
- These reviews have covered almost two-thirds of total public spending and identified potential savings of 7 percent of total expenditure.
- A 2020 review proposed measures to contain the public wage bill, including:
  - reducing employment in the general government;
  - optimizing staffing in state-owned enterprises;
  - streamlining the number of nonteaching staff at tertiary education institutions.
- Key takeaway: spending reviews can help identify areas for saving, especially when aligned with the timing and scope of annual budget cycles and medium-term expenditure frameworks.

*Dividends from Expenditure Reforms*

### A Primer on Public Spending and Economic Growth
- Channels through which public spending drives growth:
  - enhances production factors by increasing physical capital (for example, infrastructure) and human capital (through education and health);
  - public sector research (basic and applied) adds to the knowledge base firms leverage to boost productivity;
  - governments use instruments such as subsidies, cofinancing, guarantees, and tax expenditures to stimulate investment in training and R&D;
  - public procurement fosters development of new products (example cited: green hydrogen in Germany);
  - public investment can generate positive externalities where social returns exceed private returns;
  - public spending can reallocate resources across firms to better align resources with firms’ productivities (addressing market distortions).
- Effectiveness depends on spending efficiency: higher efficiency in public investment and R&D amplifies contributions to physical and human capital and scientific knowledge.

### Empirical Analysis of Spending Reforms
- Analysis approach:
  - identify historical episodes of major reallocations in spending;
  - trace economic effects at aggregate and firm levels using local projection techniques and other empirical approaches;
  - compare effects in countries with high versus low levels of spending efficiency.
- Definition of reform episode:
  - any four-year period during which spending in a particular category increases in at least three of the years, with the increase in at least one year being 1.5 standard deviations or greater; episodes can last longer than four years.
- Episodes identified: about 700 episodes across 155 countries.
- Average changes during episodes:
  - public investment increases by about 4 percentage points of total expenditure;
  - health spending increases by 0.8 percentage point;
  - education spending increases by 1.6 percentage points;
  - R&D spending increases by 0.1 percentage point.
- Funding of reallocations:
  - major reallocations toward public investment and health tend to be funded by cuts to social protection and general public services (including administration, lawmaking, and debt servicing).

### Economic Impact of Reform Episodes
- Aggregate-level impacts:
  - major increases in public investment within a fixed expenditure envelope are associated with statistically significant and economically large short- and long-term output effects;
  - example: a major episode as observed in Korea in 1975 is followed by an increase in output of about 4 percent 10 years later.
- Firm-level impacts:
  - average 12 percent increase in firms’ total factor productivity over five years accompanies episodes with greater allocations to public investment;
  - productivity gains are broad based (not merely reallocation from less to more productive firms);
  - gains are greater among firms in sectors less exposed to international trade and among firms with greater flexibility to scale up production.
- Time horizon and sector-specific results:
  - in the first five years following a reform, public investment boosts output on account of demand effects;
  - reallocations to R&D (example: Singapore in 2004) average about 3 percent output increase after five years and persist over 10 years;
  - increased health spending is followed by increases in output of about 3 percent over 10 years, primarily via higher productivity from a healthier workforce;
  - increased public spending on education does not produce a detectable output response even after 10 years (benefits materialize once educated cohorts enter the labor force).
- Cumulative multipliers (implied by effects):
  - about 0.5 for investment;
  - about 1.8 for health spending.

### Efficiency Gaps and Reform Episodes
- Role of spending efficiency:
  - in the 10 years following reallocations toward public investment, output increases by about 8 percent in countries with relatively efficient public investment (efficiency of 75 percent);
  - output responds minimally in countries with low investment efficiency (25 percent).
- Quantified effect of improving efficiency:
  - a 10 percentage point improvement in public investment efficiency can boost the output impact of reallocation toward public investment by 1.4 percentage points over a decade (example comparison: moving from the efficiency level of Guyana to that of France).
- Caution for health spending:
  - in countries with large and inefficient health spending, cutting other productive expenditures to increase health spending can lead to increased waste.

### Long-Term Impact: Theoretical Model Simulations
- Model setup:
  - two versions of a dynamic general equilibrium model calibrated for a typical advanced economy and a typical emerging market and developing economy;
  - model features: public infrastructure in production function, choice to invest time in education with public human capital investment raising productivity of education, public R&D fuels stock of innovations with gradual diffusion, and inclusion of inefficiencies in public spending.
- Key simulation results for reallocations of 1 percent of GDP from government consumption (example: administrative overhead) to targeted spending:
  - reallocating 1 percent of GDP to public investment in human capital:
    - increases output by 3 percent in advanced economies over approximately 25 years;
    - increases output by 6 percent in emerging market and developing economies over approximately 25 years.
  - reallocating 1 percent of GDP to infrastructure investment:
    - lifts output by 1½ percent in advanced economies over the long term;
    - lifts output by 3½ percent in emerging market and developing economies over the long term.
  - reallocating 1 percent of GDP to R&D in advanced economies:
    - could boost output by 3 percent over the long term.
- Timing of gains:
  - reallocations toward R&D or public investment generate output within five years for infrastructure; gains from human capital investment emerge only after about 15 years.
- Impact of closing efficiency gaps:
  - fully closing gaps in spending efficiency can increase the output impact by an additional 1½ percent in advanced economies;
  - in emerging market and developing economies, additional gains range from 2½ to 7½ percent when fully closing efficiency gaps.
  - closing efficiency gaps over 15 rather than 25 years can boost output gains by up to 2 percent for emerging market and developing economies.
  - example: reducing the gap in the efficiency of public investment in human capital from 40 percent to 10 percent can increase long-term output by 2.7 percent, compared with a 2.3 percent increase from reducing the gap from 30 percent to zero.
- Complementarities and diffusion:
  - advanced economies gain more from reallocating toward a combination of R&D and education versus focusing exclusively on one area;
  - improving diffusion of technology in the private sector augments gains from R&D spending;
  - example policy instrument: public agencies to facilitate technology transfer (example cited: Singapore’s Agency for Science, Technology, and Research).

### Policies for Efficient, Pro-Growth Public Spending
- Strategic approach:
  - avoid blanket spending cuts that indiscriminately reduce high- and low-quality programs and risk undermining essential services and long-term growth;
  - prefer targeted measures that identify inefficiencies and reallocate resources toward high-priority investments that support long-term growth and stabilize public debt relative to income.
- Institutional and process recommendations (overview):
  - strengthen institutions and processes as foundational to spending efficiency;
  - combat corruption through robust mechanisms and effective anticorruption agencies to reduce waste;
  - increase transparency and accountability through budget publication and contract disclosure.

*Source: Annex Figure 1.1.4), ch1 - Annex Figure 1.1.4)., Fiscal Monitor: Spending Smarter: How Efficient and Well-Allocated Public Spending Can Boost Economic Growth (October 2025).*

### CHAPTER 1 SpendIng SMarter: HOw eFFIcIent and well-allOcated publIc SpendIng can bOOSt ecOnOMIc grOwtH

### CHAPTER 1 SpendIng SMarter: HOw eFFIcIent and well-allOcated publIc SpendIng can bOOSt ecOnOMIc grOwtH

### Public procurement and budgetary frameworks
- Public procurement accounts for about 15 percent of GDP in member countries of the Organisation for Economic Co-operation and Development.
- In the average Latin American country, waste is estimated at about 16.7 percent of procurement costs, or 1.4 percent of GDP (Izquierdo, Pessino, and Vuletin 2018).
- Recommendations and priorities:
  - Make procurement competitive, transparent, and aligned with budget priorities.
  - Emphasize value for money through life cycle costing and risk management (IMF 2018).
  - Strengthen fiscal rules—whether direct limits on expenditure or indirect measures such as deficit and debt ceilings—and ensure they are credible and subject to independent oversight (Acalin and others 2025).
  - Extend planning horizons through multiyear budgeting to align strategic goals with annual allocations and reduce budget fragmentation.
  - Incorporate tax expenditures into medium-term frameworks and monitor extrabudgetary funds and contingent liabilities.

### Improving public investment management
- Core actions:
  - Upgrade processes for appraising economic and social benefits of projects and select projects with clear methodologies and well-defined criteria (October 2020 Fiscal Monitor, Chapter 2).
  - Use independent reviews of projects to mitigate political influence.
  - Include maintenance funding in project budgets and establish responsibilities for regular reviews of funding and maintenance—especially important in low-income developing countries.

### Spending reviews: impact, evidence, and best practices
- Empirical evidence:
  - Analysis based on 222 spending reviews in 39 member countries of the Organisation for Economic Co-operation and Development between 1999 and 2022 indicates these reviews often result in reductions in public wage bills.
  - Spending reviews lead to decreases in public wage bills both in relation to total spending and in relation to growth-enhancing spending (Figure 1.1.1, panel 1).
  - The efficiency of public spending typically increases following spending reviews (Figure 1.1.1, panel 2).
- Mechanisms through which wage bills are reduced:
  - Identifying staffing redundancies in public entities.
  - Rationalizing compensation practices for government workers.
  - Streamlining the public sector.
- Best practices to maximize benefits of spending reviews (Doherty and Sayegh 2022; Tryggvadottir 2022):
  - Well-designed objectives with concrete savings goals (control expenditures, prioritize programs, enhance efficiency).
  - Political commitment and robust governance arrangements; finance ministries should lead with support from line ministries and experts to turn recommendations into actionable measures.
  - Timely integration of reviews into budget processes so recommendations inform annual and medium-term targets and guide expenditure ceilings and allocations.
- Functional design notes:
  - Reviews vary in frequency, scope, ownership, and mandate; institutionalized, regular reviews differ from periodic, ad hoc reviews.
  - Embedding reviews early in the budget cycle helps identify low-priority programs and suggest reallocations.

### Creating fiscal room: pensions, wages, tax expenditures, transfers, and defense
- Pensions and retirement:
  - Spending on pensions tends to be persistent.
  - Linking retirement ages to life expectancy can curb spending rigidity and improve pension sustainability, especially in advanced economies.
  - Gradual reforms timed during periods of economic growth and paired with redistribution policies can ease resistance (April 2025 Fiscal Monitor, Chapter 2).
- Wage bills:
  - Align public sector wages with private sector benchmarks and implement merit-based hiring and promotion (IMF 2016).
  - In low-income developing countries, link payrolls and personnel databases and audit wage bills to eliminate ghost workers; savings can free resources to attract higher-skilled teachers (IMF 2025b).
- Health and longevity:
  - In advanced economies, prioritizing prevention of chronic diseases—such as cardiovascular disease, cancer, and diabetes—can reduce health costs and extend working lives (IMF 2023).
- Tax expenditures and social transfers:
  - Blanket tax expenditures (for example, exemptions from value-added taxes on food, medicines, and rent) are inefficient because they primarily benefit higher-income households (Abdel-Kader and de Mooij 2020).
  - Better targeting of social assistance—using data for means testing and redesigning benefits—can improve efficiency (IMF 2024b).
  - Low-income developing countries can refine eligibility criteria and consolidate fragmented programs (IMF 2024c).
  - Oil exporters and sub-Saharan African countries should replace fuel subsidies with targeted support for vulnerable groups.
- Defense spending:
  - Defense spending is rising in many countries and adds pressure to constrained budgets.
  - Economic effects of defense outlays depend on the mix of equipment, R&D, personnel, and operations.
  - Evidence suggests the strong output impacts of public investment and R&D also apply to defense components (Antolin-Diaz and Surico 2025; Moretti, Steinwender, and Van Reenen 2025).
  - Any permanent increase in defense fiscal outlays should be accompanied by strengthened procurement systems (the European Union), improved multiyear fiscal planning, and credible financing strategies.

### Improving service delivery: digital tools and private sector involvement
- Digital tools:
  - Electronic payment for salaries and social assistance reduces cash management costs.
  - Digital procurement processes generate data to reduce audit costs and flag irregular payments.
  - Information technology tools can improve access to health care and education in less-developed countries (Amaglobeli and others 2023).
- Private sector involvement:
  - Outsourcing noncore functions (transport, mail, cleaning, maintenance) can yield significant savings when private provision is lower cost (April 2014 Fiscal Monitor, Chapter 2).
  - Collaboration with the private sector on investment projects can leverage expertise and catalyze private financing, but requires careful management of associated fiscal risks (Fouad and others 2021).

### Public investment and firm productivity
- Empirical findings from firm-level data across 40 advanced and emerging market economies between 2000 and 2022:
  - Following a substantial reallocation of government spending toward public investment, average sector-level total factor productivity (TFP) increases by 12 percent over five years.
  - Allocative efficiency declines slightly in the short term but the effect reverses in the medium term (Figure 1.2.1).
  - Sectors with high elasticity of substitution between labor and capital experience more substantial medium-term gains in TFP and positive effects on allocative efficiency.
  - Sectors less exposed to international trade show more pronounced increases in TFP, consistent with evidence of home bias in public procurement and larger gains for small- and medium-sized enterprises from government purchases.

*Italic: Chapter 1, CHAPTER 1 SpendIng SMarter: HOw eFFIcIent and well-allOcated publIc SpendIng can bOOSt ecOnOMIc grOwtH, Fiscal Monitor, October 2025*

### CHAPTER 1 SpendIng SMarter: HOw eFFIcIent and well-allOcated publIc SpendIng can bOOSt ecOnOMIc grOwtH

### CHAPTER 1 SpendIng SMarter: HOw eFFIcIent and well-allOcated publIc SpendIng can bOOSt ecOnOMIc grOwtH

### References cited

- Ramey, Valerie A. 2020. “The Macroeconomic Consequences of Infrastructure Investment.” In Economic Analysis and Infrastructure Investment, edited by Edward L. Glaeser and James M. Poterba. Chicago: University of Chicago Press: 219–76.
- Shirawi, May Al-Arrayed. 1987. “Education in Bahrain—1919-1986: An Analytical Study of Problems and Progress.” Durham Theses, Durham University, Durham, England. http://etheses.dur.ac.uk/6662/
- Trionfetti, Federico. 2000. “Discriminatory Public Procurement and International Trade.” World Economy 23 (1): 57–76.
- Tryggvadottir, Álfrún. 2022. “OECD Best Practices for Spending Reviews.” OECD Journal on Budgeting 22 (1): 41–51.
- United Nations Educational, Scientific and Cultural Organization (UNESCO). 1982. “Report on Educational Reform in Bahrain.” Paris.
- United Nations Educational, Scientific and Cultural Organization (UNESCO). 2015. “Education for All 2015 National Review Report: Rwanda.” Paris.

*International Monetary Fund | October 2025*

---


_Source: https://www.imf.org/-/media/files/publications/fiscal-monitor/2025/october/english/ch1.pdf_