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Public expenditure can affect economic growth but it also has effects that are not reflected in conventional measures of economic growth because they do not involve increases in measurable output. Social expenditure and spending on health and education, in particular, generate welfare increases over and above those resulting from their effects on economic activity. No measures are available of the extent to which people benefit from reduced anxiety, better health or more enjoyable leisure - all of which are increases in economic welfare. On the other side of the account are the foregone benefits from the employment of the same resources in other ways - some of which might have been used to generate physical output. | |||
The assessment of the balance of benefits gained and loss is the subject of [[cost-benefit analysis]] - which it would be impracticable to perform on other than a disaggregated case-by-case basis. (Moreover, inability to ensure aggregate welfare that is reflected in Arrow's impossibility theorem places a limit on the feasibility of drawing such a balance | |||
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 <ref> See Frederick Fourie: ''How to Think and Reason in Economics'', Juta 2001</ref>. 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 <ref> See "The Crowding-out Controversy" on page 248 of William Baumol and Alan Blinder: ''Economics, Principles and Policy'', Harcourt Bruce Jovanovich, 1979 </ref> . | |||
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Revision as of 12:30, 2 November 2009
Public expenditure can affect economic growth but it also has effects that are not reflected in conventional measures of economic growth because they do not involve increases in measurable output. Social expenditure and spending on health and education, in particular, generate welfare increases over and above those resulting from their effects on economic activity. No measures are available of the extent to which people benefit from reduced anxiety, better health or more enjoyable leisure - all of which are increases in economic welfare. On the other side of the account are the foregone benefits from the employment of the same resources in other ways - some of which might have been used to generate physical output.
The assessment of the balance of benefits gained and loss is the subject of cost-benefit analysis - which it would be impracticable to perform on other than a disaggregated case-by-case basis. (Moreover, inability to ensure aggregate welfare that is reflected in Arrow's impossibility theorem places a limit on the feasibility of drawing such a balance
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 [1]. 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 [2] .