Lecture Public economics (5th edition) - Chapter 7: Public expenditure and growth

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Comment on the implications that the Constitution
has on government expenditure in South Africa
Discuss salient trends in the size, growth, and
composition of government expenditure in South
Africa
Identify the main similarities and differences
between government expenditure patterns in South
Africa and other countries.


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Compare and contrast two or more of the theories
that explain the growth of the government sector and
indicate whether they have any relevance for South
Africa
Consider the long-term effects of government
spending in terms of ‘new growth theory’
Discuss the role of infrastructure investment in the
economy.

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The Constitution and public goods
Constitutional entitlements.





Low income countries
• Infrastructure
• Stimulation of industrial development
• Establishment of primary education & healthcare systems
Middle income countries
• Education
• Healthcare
• Research and development
• Development of a social security system
High income countries
• Huge increases in the share of transfer payments.


The structure of government expenditure has thus shifted
away from the provision of more traditional collective
goods (defence, public administration, and economic
services) towards those associated with the growth of the
welfare state (education, health, and income maintenance),
which provide benefits on an individual rather than
collective basis and where redistributive objectives are

more dominant.


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Result of the shift in economic composition of
expenditure from capital to current outlays: high
level of government consumption spending
Education spending is high: 5.1% of GDP
– Middle income countries: 4%
– Upper middle income countries: 4.6%
– High income countries: 5.4%

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Healthcare spending: 3.6% of GDP
– Lower middle income countries: 2.7%
– Upper middle income countries: 3.5%
– High income countries: 6.9%


Macro models
• Wagner and the stages of development
• Peacock and Wiseman’s displacement effect
• The Meltzer-Richard hypothesis
Micro models
• Baumol’s unbalanced productivity growth
• Brown and Jackson’s microeconomic model

• Role of politicians, bureaucrats and interest groups.


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Spending multiplier
New growth theory (NGT)
– “Capital” also includes:
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Existing physical infrastructure (roads, street lighting)
Accumulated human capital (education, training)
Stock of technical expertise (R&D)

– Solow-type aggregate production function:
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Crowding in or crowding out effect.