Nov 8, 2017 in Economics

Improving the Efficiency of Public Finance

At a time when global countries are exposed to increased levels of pressures useful in the course of settling distinct public balances, which are results of either globalization alterations or unique demographic trends, it is considered especially important for governments to use public resources in an effective and efficient manner. Notably, public resources are derived from different set of tax models that are applied to the citizens of particular countries. Taxes generated from the citizens create distortions in the course of the resource allocation process, hence inhibiting the facet associated with the growth of different global economies.

Thus, it is reasonable for responsible public finance personnel to adopt effective public spending procedures in order to improve the long-term growth objectives through taking fair equity-based economic considerations.

The processes involved in improving effective and efficient public spending approaches help maintain significant fiscal discipline and also prevent possible alleviation of budget constraints. This is due to significant achievement made out of similar outcomes at lower operational level, where less money is spent, and at a higher operational level, where money value is created through attaining more fair outcomes within the same budget.

Therefore, this research paper tries to examine the different approaches adopted in defining efficiency of public finances in respect to public resource allocation within any given economy. The focus of this paper is not on identifying effective methodologies, which can be applied in the course of reducing public spending, but rather on ways of increasing the immediate value of this budget. 

Definition of Efficiency of Public Finance

It should be noted that the fundamental process of evaluating the efficiency of public finance expenditures is created on a relationship between resource inputs, outputs, and the overall outcome. The relationship between the three components arises under a simple scenario. For instance, the inception of both monetary and non-monetary public resources (inputs) into given activity leads to the production of given sets of outputs. Notably, the input-output ratio is considered to be the most effective way of measuring efficiency levels (Aschauer 1998).

The efficiency model of determining performance integrates procedures attributed to production possibility frontier, which prescribes expected feasible output levels in respect to given scales of production activities. This means that activities are considered efficient whenever it is ascertained that the production process deployed lower levels of inputs for a substantial amount of outputs. Thus, productivity, in this case, is simply the fundamental ratio attained by measuring the outputs produced in relation the immediate amount of inputs used (Aschauer 1998).

In the course of measuring public finance efficiency, the distinction between technical and allocative efficiency is considered to be apparent and relevant in that matter. Subsequently, technical efficiency is used to determine the exact relation created by both inputs and outputs with respect to their underlying production possibility. Thus, technical efficiency gain is considered to be a move towards the achievement of the cutting-edge production possibility. In the event that the aforementioned efficiency is scrutinized, and its scope fails to meet the economic sense of threshold set, allocative form of efficiency assumes responsibility.

Allocative efficiency of public spending introduces the elements of both costs and benefits to the operation of the central government as a whole. Consequently, it embraces linkage formed between the optimal mixtures of inputs deployed in an activity and the resulting level of output achieved in the end.

Thus, it is safe to postulate that, in the course of determining the allocative efficiency of public spending activities for any given country, there is a need for in-depth scenario analysis and access to the data highlighting the broad country-based activity strategies, as well as immediate available information on the prices of deployed input units.

It should be noted that cases of higher levels of technical efficiencies, which are attained at an individual-based capacity, do not necessarily translate to efficiency in the functioning of public-based resource sectors, especially in the absence of other alternative input mixture required in catapulting the desired output level. Another profound challenge that is encountered in the course of determining the efficiency of public spending, and, thus, recognition of both inputs and outputs is based on the assumption that many, if not more, public services are intertwined.

A fair case is whenever one form of public service uses the output of another service as its immediate inputs. Subsequently, it is ascertained that different levels of public service influence each other in the course of the public spending activity. For example, the efficient use of public transport mechanism within any given country, which is the direct output of public spending on the road network, will affect the possibility of spending on the underlying education platform. That is given that school buildings need to be accessible for the entire population to gain from knowledge offered.

Transparency of Inputs Deployed in Public Spending

In the course of measuring and determining the degree of efficiency of any given public sector, the measurement of the immediate inputs used in the production process is both evident and relevant. Notably, measurement the aforementioned public sector efficiency can be performed in both monetary and non-monetary terms. Unlike the private sector financing activity, the public sector facet depicts different levels of complexities. Transparency of inputs within the private sector is a simple activity given that informational data is accessed easily. On the other hand, the public sector spending of different accounts is deemed complex in nature, since it is challenging to access information on all input costs in all possible detalization.

Public budget allocation exercise, in essence, is never meant to provide a formidable platform for tracking down the unique sectorial expenditures (Estache 2007). Recent research studies have postulated the possibility of such indirect costs as the opportunity costs involved in the application of government-based resources, like education institutions and health care institutions. These researches also focus on the allocation of government-based fixed expenses.

Notably, the process of presenting transparency of inputs deployed ensures that higher levels of tax burdens for the citizens, which are attributed to indefinite increase of the available public finances, are shed light upon. As a result, vast methodologies are adopted in order to aid with the determination and formulation of distinct public policies, which should guide the whole activity. For instance, in the production of such public services as health and infrastructure as inputs, it embraces the activities of both public and private spending, so that private spending on teaching is taken into account while measuring the degree of the resulting educational output. In addition to this, alternative approaches used for defining significant input elements deploys such non-monetary facets as the number of civil servants involved in the given public activity and also the approximate number of hours used in undertaking the activity as a whole.

Measurement of public finance efficiency spending is intrinsically achieved within different sectors of the same economy. This is because of the homogeneity of input variable used in each of the public activities performed. However, this is not the case with cross-country analysis since different input variables are considered to be distinct and, therefore, cannot depict a clear picture of activities between both the economies in question. Consequently, the differences in cross-country variable input analysis are brought about as a result of the distinct nature of sources for the entire public finances.  This is, in turn, depicted by the existing differences of the designed tax system, so that different levels of taxation, tax transfers, as well as the outsourcing activity are measured transparently.

With respect to the perceived quality of input variables, quality alteration degree poses a significant challenge in the course of measuring efficiency levels. Thus, it is assumed that the immediate quality of variable inputs is similar in cross-country economies just as it is within a given country economy. The key goal of ensuring quality inputs and outputs should be seriously taken into consideration, given that it eliminates the possibility of underperformance and underestimation on the part of public finance spending efficiency. For instance, in case of a smaller class size, which is assumed to be quality conversant, the increase of the teacher-student ratio is taken into account, since it ascertains the increase of spending per student present in the class. However, this is not the case with the private sector spending, given that it deploys the use of price data, which is deemed useful in the process of seeking for supply of the required information on the quality, of both given sets of input and output variables.

Public Finance Outputs

Within private sectors, activities deployed in generating market value of the resource-output is depicted within the total national accounts altogether. On the other hand, public services sector deploys significant levels of input variables in order to attain sufficient output production capacity.

Thus, performance indicators become the most formidable approach used in the process of measuring the efficiency levels of output production. It is noted that the decision of implementing and adopting performance monitoring of such public sector activities as a collection of performance data is likely to catapult the resulting levels of data outputs. For instance, the OECD PISA has over a substantial period of time, deployed the use of a well-figured out measure of the educational mechanism’s performance, which is placed on a comparison of test scores for 15-year old students within given set of public learning institutions (Gundlach, Wobmann, and Gmelin 2001).

Measuring Goals-The Outcomes

The possible outcomes for any given public spending activity are based upon the long-term effects of public projects. These projects are set with respect to the underlying welfare conditions that should embrace the different scenarios depicted within the ever-changing dimensions of the whole economy. Consequently, the aforementioned achievements are used to depict the different levels of efficiencies in respect to the distinct forms of policy measures ascertained. This means that the possibility of different sets of outputs to yield similar outcome is higher than expected. Furthermore, it becomes an unsatisfactory task to try and disengage the resulting effects of different set of outputs on one probable outcome.

In most cases, the efficiency of public finances that are determined by given outcomes depicts distinct influences on certain external factors. These external factors might include changes perceived in lifestyle as well as other socio-economic platforms. They are known to exhibit different challenges with respect to isolation of transmission channels from each other. Regardless of the influences, political parties subject the outcome of given sets of growth platforms. It becomes difficult for them to achieve efficient results within a single political period.

Consequently, the performance of public finance activity is dependent on the distinct environmental factors ascertained to both institutional and structural facets. Nevertheless, these environmental factors are considered to be affecting the activities of public authorities without any form of control. These environmental factors are deemed useful in the process of measuring both the efficiency and effectiveness of public finance activities. Additionally, these factors are used as instruments that assist with the implementation of efficient and effective public spending processes.

Measurement of Efficiency Levels in Public Finance

The process of determining and measuring the efficiency of public finance activities is indirect. Therefore, there have been different data-based methodological channels, which have been used to conduct the exercise as a whole. For instance, the common methodology for measuring efficiency levels embraces either indexes or performance indicators. The most important factor to realize about the aforementioned methodologies lies in the assumption that they focus on measurements of productivity levels, given the assumption that immediate possible outcome is non-conversant with elements of technology (Farrell 1957).

Case Analysis: United Kingdom

For example, in the case of United Kingdom, the evaluation of changes within the productivity capacity of its entire public sector is reflected in indicators that are computed as distinct ratios of true and fair output representation over the underlying deployed amount of the initial input variable. It should be noted that, in the course of this calculation process, resourceful alterations for quality levels of activities are integrated in that matter.  It is assumed that the productivity measurement of the aforementioned UK public sector activity becomes a useful feature necessary for assessing the resulting changes of productivity capacity over a substantial period of time (Herrerea and Pang 2005).

Another approach used by the country to compute the efficiency of public finances is based on the production possibility frontier (Murillo-Zamorano 2004). This approach allows for efficiency measurement through parametric or non-parametric methodologies. Parametric methodology is conversant with ex-ante description of the functional type of the immediate efficiency frontier. The non-parametric methodology generates an efficiency cutting-edge that uses both input and output variables for given set of sample, hence adopting a mathematical programming methodology. The United Kingdom uses both of these functionalities in order to obtain a formidable framework through constant monitoring of efficiency of public finances.  Consequently, the decision to use both of these functionalities is core data-driven. It is stated that the aforementioned methodology directs on the application of best practices, so that the country can use it as reference point for measuring the possible efficiency gains derived from the reflected distance of the overall production possibility frontier.

The key advantage of productivity possibility frontier rests in its ability to depict transparency of input variables as well as its immediate capacity to handle multiple levels of outputs. The country deployed this methodology in order to depict specific functional form of the entire productivity frontier (Afonso, Schuknecht, and Tanzi 2006). The UK approach of utilizing productivity possibility frontier within its public sector spending is a function of public form of administration, which has distinct effects on inputs, outputs, as well as the resulting outcomes of the government policies put forth. Most EU members, including the UK, are depicted as having adopted a reformation-based strategy for their public administration facilities in order to focus on the improvement of the efficiency of its public finances (Afonso, Schuknecht, and Tanzi 2006). These reformation-based strategies include the following.

First, there are the performance-based orientations, which were conducted in order to increase attention to the medium-based budgetary allocations. This is meant to assist with the process of incorporating result-oriented approach with the process of budgetary planning. Second, there are organizational aspects, which determine the roles and responsibilities of different governmental department units in order to simplify the coordination of public administration functionality (Pritchard 2002).

Third, there is the human resource management aspect, which has assisted public administration in respect to the flexibility required in the course of recruiting as well as providing fairly flexible working environments. Fourth, there is the use of the ICT tools and frameworks, which have helped in eliminating substantial administrative costs as well as enhancing the degree of quality of provided public service. Such tools as Internet have been used to increase efficient communication platforms (Pritchard 2002).

To sum up, it is fair to postulate that this paper has expounded on the assumption that the more fair value for money is resourceful, especially because it increases the pressure needed in attaining efficient public expenditures. The paper’s description of the fundamental efficiency in different public services is deeper, and it is affected by the existing environmental factors. Thus, it is clear and concise to assume that there is a potential capacity to increase efficiency levels in the course of public spending.

Additionally, the paper expounded on the different methodologies used in measuring the approximate levels of efficient public spending within given economies across the globe. The United Kingdom has been used as a case study for this purpose. Consequently, the paper has provided the true definitions of inputs, outputs, as well as numerous outcomes that may result from the productivity possibility frontier. These definitions have the ability to influence the results of efficient public financing methodologies.

The question of improvement of the different levels of efficiency and effectiveness of public spending is highly discussed in the political scenario. Therefore, immediate set of policies should be formulated in order to fulfill significant expectations and demands arising from the citizens.

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