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Evaluating Public Expenditures: Does It Matter How They are Financed?

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  • Richard M. Bird

    () (International Tax Program, Business Economics, Rotman School of Management, University of Toronto)

Abstract

This paper reviews the relationship, or lack of it, between two bodies of literature dealing, respectively, with cost-benefit analysis and the marginal cost of public funds (MCF). It argues that, while there are no simple answers to the question of how, or to what extent, different methods of financing public expenditures should enter formally into the analysis of particular public expenditure decisions, the question is nonetheless important. When the financing of a project can firmly be linked to certain types of finance with low or no distortionary effects, it is inappropriate to apply a correction for the shadow price of fiscal resources (MCF). On the other hand, except in such cases as a practical matter an MCF correction of (say) 20 percent or so at the least does no harm and may be useful. The principal conclusion emerging from this review, however, is that far more attention needs to be paid in general not only to links between financing and spending decisions but also, more importantly, to ensuring that the process by which spending decisions are made is structured to ensure that those who make the decisions are as fully informed as possible and, equally important, that those who are affected by the decisions are also made as aware as possible of all the relevant consequences, both on the spending and financing sides of the decision.

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File URL: http://www-2.rotman.utoronto.ca/iib/ITP0506.pdf
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Bibliographic Info

Paper provided by International Tax Program, Institute for International Business, Joseph L. Rotman School of Management, University of Toronto in its series International Tax Program Papers with number 0506.

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Length: 31 Pages
Date of creation: Feb 2005
Date of revision:
Handle: RePEc:ttp:itpwps:0506

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Related research

Keywords: benefit-cost analysis; marginal cost of public funds; Wicksellian connection;

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References

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  1. Steven Renzetti, 1999. "Municipal Water Supply and Sewage Treatment: Costs, Prices and Distortions," Canadian Journal of Economics, Canadian Economics Association, vol. 32(3), pages 688-704, May.
  2. Ng, Yew-Kwang, 1987. "Diamonds Are a Government's Best Friend: Burden-Free Taxes on Goods Valued for Their Values," American Economic Review, American Economic Association, vol. 77(1), pages 186-91, March.
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Cited by:
  1. Kelchtermans, Stijn & Verboven, Frank, 2006. "Participation and schooling in a public system of higher education," Open Access publications from Katholieke Universiteit Leuven urn:hdl:123456789/238628, Katholieke Universiteit Leuven.
  2. Bird, Richard M., 2008. "Tax challenges facing developing countries," Working Papers 08/als1, National Institute of Public Finance and Policy.
  3. Stijn Kelchtermans & Frank Verboven, 2010. "Participation and study decisions in a public system of higher education," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(3), pages 355-391.
  4. Hans Lind & Roland Granqvist, 2010. "A Note on the Concept of Excess Burden," Economic Analysis and Policy (EAP), Queensland University of Technology (QUT), School of Economics and Finance, vol. 40(1), pages 78-88, March.

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