Case study 5.2: State spending A particularly controversial example of the law o
ID: 1167099 • Letter: C
Question
Case study 5.2: State spending A particularly controversial example of the law of diminishing returns is in the area of state, or public, spending. Some recent studies indicate that diminishing returns have been very much in evidence in developed countries in recent decades, with returns even being negative in some cases. An example is the IMF paper by Tanzi and Schuknecht which examined the growth in public spending in industrial economies over the past 125 years and assessed its social and economic benefits. 1994 this had risen to 47%. By this time there were large variations between countries: the EU average was 52%, in the UK it was 43%, in the USA 33%. In the newly industrializing countries (NICs) the average was only 18%. These variations over time and area allow some interesting comparisons regarding the benefits of additional spending Tanzi and Schuknecht found that before 1960 increased public spending was associated with considerable improvements in social welfare, such as in infant-mortality rates, life expectancy, equality and ling However, since then, further increases in public spending have delivered much smaller social At the beginning of this period, 1870, governments confined themselves to a limited number of activities, such as defence and law and gains, and those countries where spending has risen order. Public spending was only an average of 8% of most have not performed any better in social or GDP in these countries at this time. The higher taxes economic terms than those whose spending has that were introduced to pay for the First World War increased least. In the higher-spending countries allowed governments to maintain higher spending there is much evidence of 'revenue churning: this afterwards. Public spending rose to an average of means that money taken from people in taxes is 15% of GDP by i 920. This spending increased again often returned to the same people in terms of in the years after 1932 in the surge of welfare spending to combat the Great Depression. By 1937 taxes returned to them in child benefits. Furthermore, the average for industrial countries had reached nearly 21% of GDP benefits. Thus middle-income families may find their in many of those countries with the lowest increase in public spending since 1960, efficiency and The three decades after the Second World War innovation appear to be greater; they have lower witnessed the largest increase in public spending, unemployment and a higher level of registered mainly reflecting the expansion of the welfare state. patents By 1980 the proportion of GDP accounted for by state Another study found a similar pattern in Canada spending was 43% in industrial countries, and by specifically." In the 1960s public spending, at modestExplanation / Answer
1. In the areas which was increasing in return in public spending. These were expenditure on social welfare such as infant mortality, life expecyancy, equality and schooling.These were the initial level expenditure there was increasing return. Actually at the initial stage of industrialization there was increasing return of public spending.
In the areas like generous unemployment insurance, subsidized industry like coal, steel , fishing etc had diminishing effect on public spending. These public spending has diminishing returns because of only there was not that much improve in benefit compare to increase in spending.
3) The difference between diminishing returns and increasing return is in diminishing returns there is a return but that is diminishing over a period of time. But in negative return there is no extra benefit infact there is negative due to public spending. For example we can say generous unemployment insurance reduced the supply of labour and impeded private investment.
4) Revenue churning is phenomena which means when money is taken from people in taxes is often returned to the same people in terms of benefits. For example we can say middle income families get back their taxes return in terms child benefits.
5) The local politicians have little incentive because of only they do not get any kind of interest to spend wisely. They have not very much interest in that manner.
6) There is difficult to decide optimal level of spending. Because we do not know what is optimal in the context of situation and geographical position in the area.