Public expenditure

Definitions

Public expenditure may be understood as spending by central (federal), state and local governments and by the public corporations, or simply as spending by the public sector.

(For statistical purposes, however, those terms are open to differing interpretations, and to promote comparability in the construction of national accounts, the OECD has published the following definitions

• The public sector comprises the general government sector plus all public corporations including the central bank.
• The government sector consists of the following resident institutional units: all units of central, state or local government; all social security funds at each level of government; all non-market non-profit institutions that are controlled and financed by government units.
• The general government sector consists of the totality of institutional units which, in addition to fulfilling their political responsibilities and their role of economic regulation, produce principally non-market services (possibly goods) for individual or collective consumption and redistribute income and wealth.)

Categorisation

The principal categories of public expenditure are:

• government investment,
• government consumption,
• transfer payments

The effects of public spending

Social effects

Criteria

The largest component of public expenditure is nearly always the collection of transfer payments that is adopted in the pursuit of social justice. Its principle objective is generally to influence the distribution of income and wealth but there is no consensus concerning the ethically desireable criterion that should be adopted. It is generally accepted that the utilitarian criterion of welfare maximisation proposed by Jeremy Bentham that is used elsewhere in economics yields unacceptable results when applied to questions of distribution because of its effects upon motivation. In its place the philosopher John Rawls proposed the "difference principle", requiring that there should be no more inequality than would be required for the benefit of the least well off , but the political philosopher Will Kymlicka argued that that, too, could have averse motivational consequences. The legal philosopher Ronald Dworkin proposed the adoption of an "equality of resources" criterion, and the eminent economist Amartya Sen proposed instead the criterion of "equality of capability", but the political philosopher Robert Nozick rejected the entire concept of redistribution on the grounds that it would infringe every person's inalienable right to benefit from the employment of the talents with which he is endowed.

Economic effects

Crowding-out and crowding-in

Under normal circumstances, private sector spending on government bonds is to some extent at the expense of spending on private sector bonds, with the consequence that some private-sector investment is "crowded out". To the extent that government bonds are used to finance consumption rather than investment, the total of the country's investment is diminished, leading in time to a loss of potential output. Crowding-out is seldom complete, however, but depends upon a range of factors including elasticities of demand for investment and for money . During a recession, crowding-out may to some extent be offset by "crowding-in" as government spending makes up for the deficiency in private sector spending, leading to a recovery of demand and an increase in private-sector investment. The balance between crowding out under particular circumstances is a matter of controversy .