Spending Smarter to Boost Growth

IMF Blog, October 7, 2025

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Authors: Era Dabla‑Norris, Davide Furceri, Zsuzsa Munkacsi, Galen Sher
Date: October 7, 2025
Core finding: Analysis of 174 economies in the latest Fiscal Monitor shows governments could gain one-third more value from their spending, on average, by adopting best practices.
Implication: By spending more efficiently and better allocating existing resources, emerging markets and developing economies can increase output by 11 percent, and advanced economies by 4 percent, over the long term.

Allocate existing spending better:
- Public investment has declined by 2 percentage points of total expenditure over the past two decades.
- Public spending on education has remained about 11 percent of total spending.
- Public wage bills account on average for a quarter of total expenditure.
Improve technical efficiency of spending:
- Technical efficiency = maximum achievable output given a fixed level of public expenditure, measured by comparing observed outcomes to best-practice management, technology, and institutional arrangements.
- Example: Canada spends about $2,500 per person annually on education—roughly $300 less than other advanced economies—yet adults complete an average of 13.7 years of schooling, making Canada the second best in the world, behind Germany.

Reallocation impacts:
- Shifting 1 percent of gross domestic product from lower‑impact government consumption into infrastructure investment raises output by about 1.5 percent in advanced economies and 3.5 percent in emerging market and developing economies over about 25 years.
- Redirecting the same amount toward human capital investment (e.g., upgrading education systems) can yield around 3 to 6 percent, respectively, in those two country groups.
- Reallocation can also reduce income inequality.
Efficiency improvements:
- Improving investment efficiency by 10 percentage points can further boost output gains by 1.4 percent.
- The faster countries close efficiency gaps, the greater and quicker the payoffs.
Complementarities:
- Advanced economies: pairing research and development with human capital investment enhances productivity.
- Emerging and developing economies: combining infrastructure spending with education spending balances near‑term and longer‑term gains (physical capital boosts output quickly; human capital builds future productivity).

Constraints:
- Many countries establish minimum legal levels of funding for education, health, and social protection.
- Public salaries and pensions are hard to change.
- Globally, about one-third of spending is effectively “locked in,” with advanced economies facing the highest rigidity.
Successful approaches:
- Multiyear fiscal planning and requiring new spending to be offset in future years (examples: Estonia and Sweden).
- Linking budget allocations more closely to past performance rather than across‑the‑board cuts.
- Combating corruption, strengthening the rule of law, and increasing budget transparency.
- Competitive procurement processes, improved management of public investment, and digitalization of public finances.
- Example: Togo increased its investment efficiency by 5 percentage points after introducing cost‑benefit analyses for all projects and multiyear planning in 2016.
- Align retirement ages to life expectancy and emphasize disease prevention to curb future health costs.
- Align public compensation with market benchmarks and strengthen payroll controls—especially where public sector wages exceed private sector ones by 10 percent or more.
- Conduct spending reviews with clear objectives and links to budget decisions. Example: Slovak Republic reviews uncovered potential savings of 7 percent of public expenditure.

Analysis coverage: 174 economies.
Potential average gain from best practices: one-third more value from spending.
Long-term output increases from better allocation:
- Emerging markets and developing economies: 11 percent.
- Advanced economies: 4 percent.
Public investment decline: 2 percentage points of total expenditure over past two decades.
Education share of public spending: about 11 percent of total spending.
Public wage bills: about a quarter of total expenditure (on average).
Canada education spending: about $2,500 per person annually; roughly $300 less than other advanced economies; adults complete 13.7 years of schooling.
Reallocation effects for 1 percent of GDP:
- Infrastructure: +1.5 percent output (advanced economies), +3.5 percent output (emerging market and developing economies) over about 25 years.
- Human capital: +3 percent (advanced economies) to +6 percent (emerging market and developing economies).
Efficiency improvement example: improving investment efficiency by 10 percentage points yields an additional 1.4 percent output gain.
Togo investment efficiency increase: 5 percentage points after 2016 reforms.
Slovak Republic potential savings from spending reviews: 7 percent of public expenditure.
Public sector wage premia in some developing economies: 10 percent or more above private sector wages.

Reallocate spending toward investment and human capital (infrastructure, education).
Improve technical efficiency through better management, technology, and institutions.
Use multiyear fiscal planning and link allocations to performance.
Increase transparency, combat corruption, and modernize procurement and public finance digitalization.
Align retirement ages with life expectancy and emphasize preventive health measures.
Benchmark public compensation to market rates and strengthen payroll controls.
Conduct targeted spending reviews with clear budgetary links to identify savings and reallocate resources.

Source: Spending Smarter to Boost Growth, October 7, 2025.