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

Jorge Onrubia () and Antonio Jesus Sanchez Fuentes ()

No 2017-47, Economics Discussion Papers from Kiel Institute for the World Economy (IfW)

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 welfareenhancing fiscal consolidation packages, meanwhile promoting sound fiscal balances and growth prospects over the long term.

Keywords: public sector efficiency; technical efficiency; allocative efficiency; social welfare changes (search for similar items in EconPapers)
JEL-codes: D24 D60 D61 H40 H50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-pbe
Date: 2017
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https://www.econstor.eu/bitstream/10419/163568/1/894774263.pdf (application/pdf)

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