Discussion Paper

No. 2017-47 | July 26, 2017
How costly are public sector inefficiencies? A theoretical framework for rationalising fiscal consolidations

Abstract

Fiscal adjustments consisting of spending cuts or tax increases are generally presented as the unavoidable way for achieving public finance sustainability in the long term. However, this view of fiscal consolidation processes is limited as it leaves out other aspects related to public sector performance which are relevant not only from the macroeconomic but also from the microeconomic perspective. This paper models Public Sector Performance (PSP) by proposing a theoretical framework that integrates the conventional methodology for measuring its productive efficiency and the monetary assessment of social welfare changes linked to public policy reforms. Two equivalent measures of social welfare change generated by improving (or worsening) productive efficiency are deduced using duality theory. The first is obtained from the cost function, while the second arises directly from the production function. The results reveal that taking advantage of budgetary savings obtained from this approach constitutes a valuable tool for designing welfare-enhancing fiscal consolidation packages, meanwhile promoting sound fiscal balances and growth prospects over the long term.

JEL Classification:

D24, D60, D61, H40, H50

Assessment

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Links

Cite As

Jorge Onrubia-Fernández and A. Jesús Sánchez Fuentes (2017). How costly are public sector inefficiencies? A theoretical framework for rationalising fiscal consolidations. Economics Discussion Papers, No 2017-47, Kiel Institute for the World Economy. http://www.economics-ejournal.org/economics/discussionpapers/2017-47


Comments and Questions


Romar Correa - Comment
July 31, 2017 - 09:04

Response to
How costly are public sector inefficiencies? A theoretical framework for rationalising fiscal consolidations

Congratulations, Jorge and Jesús, for an elegant and topical piece. You have provided the join of theory and policy at its best. What follows reflects my fuddy duddiness or there ...[more]

... might be cobwebs that you could clear up.
Just to be clear, the minimum cost X** on page 6 must be the product of price and quantity. The numerator in equation (4), consequently, is a ‘nominal variable’ defined by a given quantity and price, the denominator a ‘real’ variable defined by a given quantity only. How is X** different from c**? What is the “derivation” leading from (5) to (6)? Why “expenditure-efficiency”? The usual duality there applies to the theory of the consumer. What we seem to have instead is no more than a cost function. My confusion is sharp at the lead up to (8) where X** is called the vector of inputs. The “social welfare function” defined in (11) does not seem to use the “expenditure-efficiency function defined in (10)”. (Does equation (14) figure anywhere?). I missed the proof of Proposition 1. Following (18) does not the denominator in the “grouping” following equation (29) vanish?
Sincerely, Romar Correa