Assessing the welfare impacts of public spending

An important objective of public spending is to raise household living standards, particularly for the poor. But how can final impacts on this objective best be assessed? Evaluating a policy's impact requires assessing how different things would have been in its absence. But the counterfactual of no intervention is tricky to quantify. The author surveys the methods most often used to assess the welfare effects of public spending. Limitations of current practices are studied and implications for future best practices are drawn. The methods used to assess welfare impacts broadly fall into two groups: benefit incidence studies and behavioral approaches. Benefit incidence studies ignore behavioral responses and second-round effects, using the provision cost as a proxy for benefits received. Behavioral approaches present quite different drawbacks, in attempting to represent individual benefits correctly. A number of recent studies usefully combine both approaches. It is still uncertain whether behaviorally consistent methods actually point to fundamentally different policy recommendations. What can be concluded is that we need to diversify and compare results from our evaluation methods and broaden our definition of well-being, to see how various facets of living standard are affected by public spending.