Chapter 7

Public expenditure and growth

Learning outcomes

• 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.

Learning outcomes (continued)

• 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.

The constitutional framework

• The Constitution and public goods• Constitutional entitlements.

The size and growth of general government expenditure

The economic composition of general government expenditure

The functional composition of general government expenditure

Comparisons with other countries

Low income countries• Infrastructure• Stimulation of industrial development• Establishment of primary education & healthcare

systemsMiddle income countries• Education• Healthcare• Research and development• Development of a social security systemHigh income countries• Huge increases in the share of transfer payments.

Saunders and Klau (1985)

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.

Evolution of government spending in South Africa• 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%

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

Reasons for government growth

Macro models• Wagner and the stages of development• Peacock and Wiseman’s displacement effect• The Meltzer-Richard hypothesisMicro models• Baumol’s unbalanced productivity growth• Brown and Jackson’s microeconomic model• Role of politicians, bureaucrats and interest groups.

Economic effects of government activity• Spending multiplier• New growth theory (NGT)

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

– Solow-type aggregate production function:• Y = f(Kp, Kg, eN)

• Y = f[Kp(Kg), Kg, e(Kg)N]

• Crowding in or crowding out effect.

Thank you.