2014/2015 winter semester

Public Economicslecture 4: Segmentation and the extent of the

public sector

Contents

• Segmentation of the national economy (two criteria)

• Pestoff triangle for national economy segmentation

• Segmentation of the public sector• Size of the public sector (financial and non-

financial indicators) • Factors influencing the extent of the public sector,• Concrete example

Segmentation of the national economy

• by sectors´ criterion,

• By financing criterion.

Criterion „by sectors“

• Primary sector (retrieval and the extraction of raw material)

• Secondary sector (transformation of the raw material into goods)

• Tertiary sector services connected with physical goods (maintenance, distribution)

• Quaternary sector services connected with the social needs (public administration, Police, Army)

• Quinary sector services connected with the development of a person (knowledge information, scholling, health care)

Criterion of financing

National economy

Profit sector Non-profit sector

Public sector Private sector Households sector

Pestoff Triangle of national economy segmentation

Public sector

Private sector

State(Public

agencies)

Non-p

rofit

Profi

t

Market (Private Firms)

Formal

Informal

Community(households, families)

AssociationsVoluntary/ non-profit

organizations

Segmentation of the public sector

1. Block of social needs( public administration, police, justice, defense)

2. Block of human development ( education, culture, sport, health care, social needs)

3. Block of knowledge and information (science and research, information systems, mass media)

4. Block of technical infrastructure (transportation, communication, energy, water)

5. Block of private goods financed by public means(housing, agriculture)

6. Block of existential certainties(employment, social insurance, environment)

Defining the size of the public sector

• Problematic – – How to define the role of the state in the

economy?– Quantitative vs. Qualitative measures?

• Indicators – – Financial,– Non-financial

Financial indicators

1. State expenditure at all levels of government administration and self-government,

2. The capital of state corporations and state owned enterprises,

3. Tax expenditure (includes tax relief = prescribed amount of taxes - paid taxes - tax evasion)

=> Some scholars does not include the two last ones.

Other financial indicator

• Indicator of public revenues and expenditure volume.

• Constructed as the GDP per capita (per one inhabitant.)

• Used to see the weight of one department in the whole public sector (ex. The share of education expenditure, health care…)– Simplicity, international comparability– Not realistic but indicative.

Indicator of the structural flexibility of the public spending

• measures the percentage of change in public expenditure (PE) to the percentage change in gross domestic product (GDP) for a specific time period

E>1 then the public spending rises faster that the GDP=> extensive PSE=1 equal pace development => stable PSE <1 public spending grows slowly than GDP => restricted PS

Non-financial indicators

• The number of employees in the public sector.• The share of employees revenues in the public

sector to the total revenues of the same activity in the national economy.Public-Private-Partnership (PPP)

Factors influencing the extent of the public sector

• Economic• Geopolitical• Historical• Cultural and religious• Political• Demographic

Economic factors

• The scope of the public sector depends on the stages of economic development.

• Underdevelopment, developing stage, industrial stage, post-industrial stage.

Political factors

• Political system of the country – dirigisme, democracy.

• Within democratic state – leftists and rightists

Demographic factors

• The increase of certain group of people inside the society creates a pressure on the public spending.

• Ageing people, birth rate

Historical factors • Development requires investments,• Demographic growth requires more expenditure,• Expenditure in defense,• Overconsumption of public goods (fiscal illusion) • Low productivity of the public sector (Baumol´s

law)• Growth of the public services provision (Welfare

state) • Inefficiency of the public sector (bureaucracy

theory),• Demonstration effect (more economic growth =>

more expenditure)

Questions

• Do you think as student from Turkey, Portugal, Taiwan, France, Brazil that the public sector in your country is large, medium or small? and why?

DNKFRAFINBEL

GRCSWEAUTITA

NLDSVNHUNGBRPRTESPISL

DEUCZEISR

CANNORLUXPOLIRL

JPNUSAESTTURSVKCHEKORMEX

0 10 20 30 40 50 60 70

Compensation of employeesSocial benefits and social trans-fers in kind Intermediate consumption Gross fixed capital formationOther

NZL

IRL

GBR

NOR

CZE

TUR

PRT

GRC

AUS

USA

MEX

KOR

DNK

SWE

ITA

NLD

AUT

BEL

FIN

FRA

JPN

ESP

CAN

CHE

DEU

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Central governmentState governmentLocal governmentSocial security

Question

• Do you think that the size of the public sector is important? Or do we have to consider other factors?

Thank you for your attention