INTRODUCTION:
III. COMPOSITION AND EFFICIENCY OF EXPENDITURE
The composition of public expenditures is one of the key factors that influence the quality of public
finances. This has been pointed already out in Section I. Some spending components seem to have close
positive links to economic growth, while others are regularly associated with decreasing overall
efficiency of government activities. The latter seems to be particularly the case when overall expenses are
high.
In Section III public expenditure receives a deeper inspection which goes far beyond composition- and
size-effects. Undoubtedly, the composition and overall volume of government expenditure are central
variables in the discussion of the quality of public finances. Yet, this is only one side of government
activities, the input side. Public money spent on the “right” objects is not necessarily money spend
wisely. Whether you receive good value for money is decided on the output and outcome side. Thus,
attaining a high degree of effectiveness and efficiency of government policies is an important issue in the
QPF-discussion.
The main challenges for such analysis, such as the measurement of inputs, output and outcomes to obtain
efficiency indicators, and the main reform avenues, such as structural and institutional reforms, are
summarised in a joint EPC/ European Commission Issues Note (2007). As an example, this paper
examines existing data on the efficiency and effectiveness of public spending on education and R&D.
Here, cross-country comparisons in terms of efficiency and effectiveness of public spending can be very
enlightening. Yet, one must be well aware that data limitations and the methodology applied can
significantly affect the results. The note makes a strong case for further common exchange of information
and studies based on countries' experiences to identify key drivers of efficiency and effectiveness and find
a better understanding of sound principles and methods for efficiency improvements.
The paper by Lilienthal (2004) addresses the question how expenditure programmes aimed at boosting
innovation can be properly appraised. It focuses on impact assessment with special reference to public
investments regarding R&D and innovation and aims at giving some general guidelines on possible
aspects and criteria for an impact assessment.
Comparative estimates of efficiency of public expenditure and overall public sector performance for new
Member States are provided in the paper by Afonso, Schuknecht and Tanzi (2005). The paper delivers a
survey of conceptual and methodological issues related to the measurement and analysis of public sector
efficiency. Then, the authors construct composite public sector performance and efficiency indicators and
finally use data envelopment analysis to compute input and output efficiency scores and country rankings.
Here, the ensuing paper by Afonso and St. Aubyn (2006) is tied on directly, yet with a further-improved
methodology. The authors compare systematically the output from the health system of a set of OECD
countries with resources employed (doctors, nurses, beds etc). Results from the first-stage of the analysis
imply that inefficiencies may be quite high. Yet, by usage of a two-stage approach, it is shown that
inefficiency in the health sector is strongly related to variables that are, at least in the short- to medium
run, beyond the control of governments, e.g. GDP per capita, the education level, and unhealthy lifestyles
as obesity and smoking habits.
In a case study for Austria, Mandl (2004) describes the Austrian approach towards raising the quality of
public expenditures. It aims at detecting dynamic problems in public finances by analysing the time-
structure of public expenditures and its impact on GDP and employment growth. Based on the findings,
measures are identified. They include those that dampen the pressure on “past-related” spending, such the
pension reform in view of an ageing of population and the aim to achieve a balanced budget balance over
the cycle. The approach is expected to help in prioritising expenditures for future investment, without
worsening the fiscal balance.
In the final paper of Section III, van Hengel and Nahuis (2005) present a case study for the Netherlands
with a special focus on the search for knowledge about its effectiveness of innovation policy. At first