Summary ECS3704 STUDY UNIT 6 - PUBLIC EXPENDITURE AND GROWTH.

ECS3704 STUDY UNIT 6 - PUBLIC EXPENDITURE AND GROWTH. SIZE, GROWTH AND COMPOSITION OF PUBLIC EXPENDITURE Size And Growth Of Public Expenditure In SA General government expenditure has grown significantly since 1960: • Real resource use (i.e. government expenditure) increased on average by 3.9% per year between 1960 and 2009; • See Figure 7.1, P. 104, prescribed textbook:  Resource use as % of GDP – from 16.6 to 24.8;  Resource mobilization as % of GDP – from 20.5 to 35.8. In summary, government expenditure grew significantly both in real terms and as % of GDP since 1960, but rate of growth in both has slowed in recent years. Changing Economic Composition Of Public Expenditure • See Table 7.1, P. 105, prescribed textbook. Summarises trends in economic classification of government expenditure; • Look at third column under % of total: various components. Note decline in investment (fall in capital formation spending); • Recent reorientation of expenditure in part policy driven, but also due to reduction in public debt afforded by widening of tax base, budget deficit reduction, lower interest rates etc. Functional Shifts In Public Expenditure • See Table 7.2, P. 108, prescribed textbook – “Functional Classification Of Government Expenditure”; • Data not available prior to 1983, but there is evidence that government spending increased in 1960s-1970s, mainly from defence spending, servicing government debt, etc.; • In 2009, social service spending the biggest component, followed by protection services; • As % of GDP, government spending decreased from 1994- 2001, but then increased again from . It is easy to see which particular areas of spending were prioritized e.g. public order, education, health etc.; • Government spending is now more oriented towards delivery of social services and maintenance of public order. There is also more emphasis on “efficiency” regarding the implementation of government programmes. COMPARISONS WITH OTHER COUNTRIES • The evidence suggests that government spending tends to grow in absolute/relative terms as per capita income increases; • The following is a summary of the composition of government expenditure generally encountered at different development levels:  Low Income Countries: Priority is capital investment in infrastructure; stimulation of industrial development; establishment of primary education/health-care systems;  Middle Income Countries: Priorities are education; healthcare; research and development; characterized by the beginnings of social security system;  High Income Countries: Characterised by: a huge increase in transfer payment levels via social security system; and reduced public investment. Thus, generally, we see a move from the provision of collective goods and services to individual benefits of a mainly redistributive nature In SA, we cannot attain the same levels spent on education, health etc. as developed countries by simply increasing the portion of national income spent on such. This would require the implementation of unsustainably high tax rates. It is argued that such levels may only be eventually reached by implementing policies that lead to economic growth and a raising of per capita income. REASONS FOR THE GROWTH OF GOVERNMENT: MACRO MODELS There are different ways of measuring the size of government. Over the past five decades, the SA government has steadily increased its share of the economy, both in terms of use and mobilisation of national resources. Algebraically, government expenditure as a % of GDP can grow in any of the following three ways: • Economy grows in real terms, but government expenditure grows faster; • Economy shrinks, but government expenditure continues to grow, or shrinks by less; • Economy stagnates, but government expenditure continues to grow. Generally, as in SA, most industrial and developing countries have experienced growth in government share of the economy. Prior to discussing theories regarding such, two qualifications must be pointed out: • Government expenditure growth is not necessarily the same as growing share of government in the economy; • It is important to distinguish between the empirical issue of expenditure growth and the reasons for such; and the normative question as to just what is the appropriate size of government.