ET : Effective spending : Nov 13,2007
FIGURING IT OUT
Effective spending
THE rationale for government expenditure is that public spending will have a positive impact on economic growth and GDP, if the benefits exceed the marginal cost of public funds. After all, public spending does influence output growth if it affects capital formation or productivity improvement. But while there is a clear case for improved development delivery mechanisms, read quality public health, education and other infrastructure services, there is also the need for holistic policy design. Take health, for instance. International experience suggests that better housing can significantly improve health indicators.
A recent World Bank paper finds that simply replacing dirt floors with cement flooring considerably improves family health, especially of children. Specifically, a study of Mexico finds that complete substitution of dirt floors by cement leads to as much as 78% reduction in parasitic infection, 49% drop in diarrhoea, 81% decrease in anaemia and 36 to 96% improvement in cognitive development.
Additionally, the working paper Housing, Health and Happiness finds that replacing dirt floors by cement floors significantly improves adult welfare, as measured by increased satisfaction with housing and quality of life, and also lowers depression and perceived stress levels. Given that child health indicators remain quite dismal pan-India, the larger policy agenda ought to be more integrated initiatives across sectors and programmes, so as to make a real dent on the ground. The idea is to make firm floors very much a part of preventive health. Such a focus can definitely be cost-effective from a societal view.
Overall, the global experience is that governments generally spend between 20% and 30% of GDP on goods and services. If they could increase the efficiency of the use of these resources, on a regular year-onyear basis, the impact on GDP would surely be substantial. When considering particular fiscal measures though, the decisive rule to undertake a project or programme ought to be based on whether the marginal social benefit exceeds the marginal social cost of public funds. As a matter of fact, estimating the marginal cost of public funds is as important as quantifying the project benefits.
After all, public spending necessarily implies raising taxes, this fiscal or in the future. And taxation does alter consumption and production decisions economy-wide. Both the composition and levels of production and consumption do end up being different than they would be in the absence of taxation. Hence, economic welfare changes as a result of tax variations. Thus the need for determining the economic viability of fiscal initiatives, and opt for budgetary discipline.
International experience does show that spending predictability actually means more certainty on the growth front. The empirical evidence is that volatility in fiscal policy also means corresponding high welfare costs, in terms of variability in output and growth. So spending expansion and imprudent taxation levels actually make the economy worse-off, in terms of outcomes. The observed trade-off calls for improved governance standards, including specific indicators to access and evaluate public spending programmes.
In fact there seems much scope for improved governance indicators, to keep better tab of policy implementation when it comes to public health, education, and other such budgetary allocations.
Ultimately, though, holistic policy design is critical for the most optimal public expenditure outcomes and delivering welfare gains across the board. For instance, replacing dirt floors with cement flooring may be less effective when households do not have access to safe water supplies. The lack of such supplies would mean that the major cause for parasite infections would remain, despite the improved living environment. Also, malnourishment would imply heightened susceptibility to ill health. The big picture needs to be kept sight of, while improving sectoral allocations. Otherwise, public spending can be both more costly and much less effective.
Publication: ET; Date:Nov 13, 2007; Section: propectives; Page Number:15