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Does cutting back the public sector improve efficiency? Some evidence from 15 European countries

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Abstract

The successful development of the welfare state that transpired for three decades after WWII in the developed countries, came to a halt around the end of the 1980s. Since then, the number of articles and books dedicated to the crisis of the welfare state has increased. We can now assert that at the turn of the century, almost all industrialized countries had cut at least “some” entitlements in their welfare program along with other expenditure items, and the trend continued in the first decade of this century. To defend the cuts and possibly to justify continuing cuts, several economic reasons, both theoretical and empirical, have been highlighted. From mention of Baumol’s disease to the fiscal crisis, the support for making such decisions by governments gained momentum, with their political inspiration changing during the same period in favor of more conservative, right-wing positions. The low productivity of the public sector and the high level of tax burden were the substantial arguments used to support cuts. The aim of this paper is to provide an empirical investigation into the impact of retrenchment of the public sector on the performance of 15 European countries. In particular, we aim to empirically test the view that “big government” reduces a country's efficiency. We have found that no such empirical support exists. We have also included analysis of the distribution of income through the Gini index and have found the standard trade-off relation between inequality and efficiency.

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  • Sabrina Auci & Laura Castellucci & Manuela Coromaldi, 2013. "Does cutting back the public sector improve efficiency? Some evidence from 15 European countries," CEIS Research Paper 274, Tor Vergata University, CEIS, revised 30 Apr 2013.
  • Handle: RePEc:rtv:ceisrp:274
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    1. António Afonso & Miguel St. Aubyn, 2013. "Public and private inputs in aggregate production and growth: a cross-country efficiency approach," Applied Economics, Taylor & Francis Journals, vol. 45(32), pages 4487-4502, November.
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    3. Folster, Stefan & Henrekson, Magnus, 2001. "Growth effects of government expenditure and taxation in rich countries," European Economic Review, Elsevier, vol. 45(8), pages 1501-1520, August.
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    Cited by:

    1. L. Randall Wray & Xinhua Liu, 2014. "Options for China in a Dollar Standard World: A Sovereign Currency Approach," Economics Working Paper Archive wp_783, Levy Economics Institute.
    2. Wray , L. Randall & Fernandez Lommen, Yolanda, 2013. "Monetary and Fiscal Operations in the People’s Republic of China: An Alternative View of the Options Available," ADB Economics Working Paper Series 380, Asian Development Bank.

    More about this item

    Keywords

    Stochastic frontier production function; public sector productivity; welfare;

    JEL classification:

    • H11 - Public Economics - - Structure and Scope of Government - - - Structure and Scope of Government
    • H53 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Welfare Programs
    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • D6 - Microeconomics - - Welfare Economics

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