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Introduction The Economics Of Public Expenditure Notes

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Introduction: The Economics of Public Expenditure The welfare state and its objectives (pages 6-11) Individual welfare comes from other sources as well as from state activity;

• The labour market (most important?) through wage income. Full employment is a major component of welfare. 1950s-60s had high employment and productivity which were just as beneficial as redistribution. Firms also provide occupational welfare when workers face sickness, injury and retirement.

• Private provision e.g. insurance, personal savings.

• Voluntary welfare i.e. family members or others providing time for free or below market price, or make charitable donations.

• State provision e.g. benefits in kind (education (19% social spending), medical care, care for the handicapped), cash benefits (social insurance on the basis of previous contributions and specific contingency like being unemployed, and non-contributory benefits done on income), tax concessions to firms. A service may be funded by the state but maybe not publicly produced. The state can produce the service (NHS, 27% of social spending) and supply it for free, or can give individuals the money to make their own purchases or pay for goods produced in the private section - PRIVITISATION. The state through various government levels is the most important single agency involved in the UK and in most industrialized countries. Welfare state summarises government activity in four major areas - cash benefits, health care, education and food, housing and other welfare services. OBJECTIVES - Efficiency has at least 3 aspects of allocative efficiency.

1. Macro-efficiency the efficient fraction of GDP should be devoted to the totality of welfare-state institutions.

2. Micro-efficiency should ensure the efficient division of total welfare-state resources between the different cash benefits.

3. Incentives adverse effects on labour supply, employment and saving should be minimised. Supporting living standards (equity) also has at least 3 components, 5 and 6 aim for economic security so efficient and equitable.

4. Poverty relief no individual or household should fall below a minimum standard of living. The aim is to eliminate or alleviate it. Effectiveness can be measured by the number of people below the poverty line.

5. Insurance no one should have an unexpected and unacceptably large drop in their living standard - major objective of unemployment benefits and most health-related benefits. Measured by the replacement ratio.

6. Income-smoothing individuals should be enabled to reallocate consumption over their lifetime concerned with predictable falls in income. Reduction of inequality is just about equity.

7. Vertical equity the system should redistribute towards individuals or families of lower incomes. All income-tested benefits will do this to some extent. Success can be measured by inspection of aggregate inequality measures.

8. Horizontal equity differences in benefits should take account of age, family size etc. and differences in med treatment should only reflect relevant factors i.e. not ethnic backgrounds. Social solidarity is concerned with broader social goals.

9. Dignity cash benefits and health care should be delivered so as to preserve individual dignity and without unnecessary stigma.

10. Social solidarity benefits should depend on criteria unrelated to socioeconomic status. Benefits should be high enough and health care good enough to allow people to participate fully in the life of the society in which they live. Administrative feasibility has 2 aspects.

11. Intelligibility the system should be simple, easy to understand and as cheap as possible.

12. Absence of abuse benefits should be as little open to abuse as possible. There are PROBLEMS as it is hard to define and measure. 1-3 can be defined but are harder to measure e.g. tax incidence make it hard to assess how far they are achieved. How can poverty be defined in 4? How large is an acceptable drop in living standards in 5? Some objectives also conflict by definition e.g. income smoothing suggests someone with higher earnings should receive higher benefits with clashes with redistribution. Concepts like dignity, social solidarity and stigma are hard to define.

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