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Skip to 0 minutes and 13 seconds When a government or any public sector organisation spends public money, there are various consequences. First, the money is spent to acquire resources and inputs, such as raw materials, services and the labour of public sector employees and professionals. This money goes into circulation in the economy so public spending results in a stimulus to business, consumptions and investment. Second, money is spent to carry out public programmes and deliver public services. This results in improved conditions for the economy and society, in such terms as, for example, a healthier workforce or improved education or a safer environment.

Skip to 1 minute and 0 seconds The decision to undertake public expenditures should be taken on the basis of a careful appraisal of the consequences of the decision. The appraisal should be based on the relative value of the benefits and the costs that will arise from the public expenditure. For example, let’s take a government that is considering whether to build a new highway. The public expenditure on the highway may result in various benefits in terms of shorter travelling time, cheaper logistics and more trade between two locations. If we estimate the economic value of these benefits, then we can compare it to the cost of building the new highway and appraise whether the public expenditure is worth undertaking.

Skip to 1 minute and 51 seconds An issue here is how to estimate the value of the benefit from those public expenditures. There are various techniques that can assist us to do this, such as, for example, cost-benefit analysis. In cost-benefit analysis, we estimate the benefits of a programme or a project in terms of the additional utility that the users or citizens enjoy from the running of a programme or the implementation of a project. One way of doing this is to estimate the users’ or citizens’ willingness to pay for the additional utility. Another is to infer the value of a programme or project on the basis of the behaviour of users or citizens in other activities.

Skip to 2 minutes and 32 seconds Another one is simply to ask users or citizens about their preferences or expectations.

What is the return to public expenditures?

When a government or any public sector organisation spends public money there are various consequences.

Here, we examine just how governments assess whether a public expenditure is worth undertaking and look at how we measure the benefits obtained from public expenditures in economic terms.

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This video is from the free online course:

Understanding Public Financial Management: How Is Your Money Spent?

SOAS University of London