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How are expenditure decisions made?

How are expenditure decisions made, in the public and private sectors? This short video featuring Dr Ben Hardy examines the differences.
To look at how public expenditure decisions are made, it’s helpful to think about the differences between the public and private sectors. The underlying rational for expenditure decisions is different between these two sectors. The public sector exists to serve the populace and its needs. While the private sector exists primarily to satisfy demand and to make a profit, although there are some not-for-profit organisations in the private sector. The public sector is usually attempting to satisfy multiple objectives. For example, those of parents, teachers, pupils, and even educational suppliers when we’re in the education sphere. By contrast, the for-profit private sector aims to produce sustainable returns. The output of the public sector is often quite abstract. For example, health or education.
Private sector outputs are much more concrete, such as a mobile phone or antivirus software package. The public sector is configured to administer policies according to political objectives in a fair and hopefully efficient manner, while the private sector is organised to meet business objectives, such as profit and market share. Finally, there’s the issue of accountability. The public sector is accountable to elected officials and, ultimately, the electorate. The private sector is only accountable to the providers of capital, although practically, they may have to take account of other stakeholders. So why does this matter?
Well, the difference between public and private sectors means that decisions about expenditure in the public sector are not simply based on maximising returns, as would say a decision to invest in a new product or service in the private sector. Rather, they’re based on adequately satisfying the needs of various parties. So in a democracy such as the UK, for example, the decision where to site a new airport is not simply a matter of building in the most cost-effective location, but also taking into account local residence noise concerns, the commuting patterns of airport workers, pollution concerns, the political makeup of affected constituencies, and much else besides. In this case, there are many more parties and they have more voice.
This means that public sector decision-makers face a very different, and often more complex set of issues than people in the private sector. In states with different political structures, expenditure decisions may be made rather differently. In an authoritarian state, the decision as to where to site an airport might be imposed by the state on its citizens. Effectively, the state says, ‘We’re building it there because we want to.’ Clientelist states, where there’s an exchange of goods or services for political support, will have other factors in the mix. In this case, the decision as to where to site an airport might be affected by who owns the land.
So the airport might get built where the decision-maker’s family just happen to own the land. And the family will just happen to make a lot of money in the process. So the process of deciding how to spend money is influenced by a different set of factors in the public sector as compared to the private sector. And there are different consequences. Get it wrong in a democracy, and you’ll find that you’re looking for a new job soon afterwards. Get it wrong in a clientelist state, and you may find that your family and allies are considerably poorer. Get it wrong in a totalitarian state if you’re not in charge, there could be serious consequences.
Get it wrong in a totalitarian state when you are in charge, and nothing happens.

To understand how public expenditure decisions are made, we need to think about the differences between the public and private sectors.

In this short video, Dr Ben Hardy outlines the basis for spending decisions in each sector, and the impact this has on individuals and businesses alike.

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