Abstract
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.
Highlights
An essential issue to be analysed in depth is the relationship between the productive efficiency of the public sector and the potential budgetary savings associated with its improvement
The aim of this paper is to provide a theoretical framework which consistently allows for integration of the conventional methodology for measuring productive efficiency and the monetary assessment of social welfare changes related to the public sector performance
Data Envelopment Analysis (DEA), Free Disposal Hull (FDH), econometric/stochastic, and semi-parametric approaches have been extensively applied we focus here on information requirements as a key ele
Summary
An essential issue to be analysed in depth is the relationship between the productive efficiency of the public sector and the potential budgetary savings associated with its improvement. This is true especially for advanced economies in which effects of the current crisis are affecting public finances in a more evident way. Measurement of these budgetary savings constitutes an alternative fiscal policy tool which goes beyond the traditional view of fiscal consolidation (spendings cuts or tax hikes). The trade-off between allocative and non-allocative objectives may affect management in these public sector units
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