Measuring Public Spending Efficiency in Brazilian Municipalities: A Nonparametric Approach

Abstract

The importance of public expenditure in such social services as education and public health represent a decisive contribution to a nation’s progress. A major problem is how to allocate government spending in such a way as to provide public services efficiently. In a political federation as the Brazil, the critical issue becomes the choice of the degree of decentralization in the provision of public services. Decentralization is advantageous in the production and distribution of public services due to: i) the proximity of users facilitates the ranking of the priorities; ii) it is easier to control the use of resources; Hi) the requirements of managerial capacity are lower.In this paper we assess the performance of Brazilian municipalities regarding the utilization of public revenue. The paper inquires whether, for a given availability of services, local governments minimize the expenditure needed to finance those services. To answer these questions, a cost-efficiency frontier will be determined by using various techniques of efficiency analysis: two DEA variants — DEA-F and DEA-V — and the FDH approach.Our results suggest that the Brazilian recent municipal decentralization policy does not lead to an efficient use of public resources. The outcome of this policy was a proliferation of small municipalities that, due to their size, do not benefit from the economies of scale inherent to the production of certain public services. They tend to operate with higher average costs thus bringing about a considerable waste of resources, which can be inferred by estimating the excessive public spending that characterizes those cities.