Publication: Public Expenditure and Growth
Date
2007-10
ISSN
Published
2007-10
Author(s)
Abstract
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.
Link to Data Set
Citation
“Herrera, Santiago. 2007. Public Expenditure and Growth. Policy Research Working Paper; No. 4372. © World Bank, Washington, DC. http://hdl.handle.net/10986/7366 License: CC BY 3.0 IGO.”
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