Public Expenditure & Economic Growth — Week 6 Notes

Composition & Efficiency of Public Expenditure

• Focus: Week 6 topic for Economics 3023S at the University of Cape Town (Required Reading: Gruber, Ch. 9).

• Main idea: Government expenditure can be analyzed by how it is composed and how efficiently it supports growth and development.

What makes up government expenditure?

• There are two primary ways to classify public expenditure:

  • Economic composition: distinguishes between current and capital components.

  • Functional composition: distinguishes between goods and services (i.e., what the money buys).

• These classifications help assess fiscal priorities, efficiency, and the long-run impact on growth and welfare.

Two classifications in detail

• Economic composition (current vs. capital):

  • Current expenditure funds ongoing operations and services (e.g., wages, purchases of inputs, social transfers).

  • Capital expenditure funds investments in infrastructure and durable assets (e.g., roads, schools, equipment) that support future growth.

• Functional composition (goods and services):

  • Groups spending by the function or purpose of the expenditure (e.g., general public services, defence, health, education, social protection).

  • Allows assessment of policy priorities (e.g., education vs. defence) and the social/economic emphasis of spending.

Table 7.1: Economic composition of public expenditure (1994, 2006, 2017)

• Scope: Items as % of total expenditure and % of GDP, based on Government Finance Statistics data (fiscal years ending 31 March).

• Key items and values (approximate, values shown as %):

  • Compensation of employees: $33.9 ext{ (total)} <br>ightarrow 10.6 ext{ (GDP)} ext{ (1994)}; \, 33.9 ext{ (total)} <br>ightarrow 10.5 ext{ (GDP)} ext{ (2006)}; \, 35.5 ext{ (total)} <br>ightarrow 13.1 ext{ (GDP)} ext{ (2017)}$

  • Purchases of goods and services: $23.4 ext{ (total)} <br>ightarrow 7.3 ext{ (GDP)} ext{ (1994)}; \, 26.7 ext{ (total)} <br>ightarrow 8.2 ext{ (GDP)} ext{ (2006)}; \, 26.3 ext{ (total)} <br>ightarrow 9.7 ext{ (GDP)} ext{ (2017)}$

  • Interest on public debt: $14.6 ext{ (total)} <br>ightarrow 4.6 ext{ (GDP)} ext{ (1994)}; \, 9.4 <br>ightarrow 2.9 ext{ (GDP)} ext{ (2006)}; \, 9.2 <br>ightarrow 3.4 ext{ (GDP)} ext{ (2017)}$

  • Subsidies: $0.05 ext{ (total)} <br>ightarrow 0.02 ext{ (GDP)} ext{ (1994)}; \, 1.7 <br>ightarrow 0.5 ext{ (GDP)} ext{ (2006)}; \, 2.6 <br>ightarrow 1.0 ext{ (GDP)} ext{ (2017)}$

  • Grants: $1.5, 2.4, 2.3 ext{ (totals)}$; $0.5, 0.7, 0.9 ext{ (GDP)}$

  • Social benefits: $11.4, 11.1, 11.5 ext{ (totals)}$; $3.6, 3.4, 4.2 ext{ (GDP)}$

  • Other payments: $7.4, 7.0, 5.3 ext{ (totals)}$; $2.3, 2.2, 2.0 ext{ (GDP)}$

  • Cash payments for operating activities (sub-total): $92.2, 92.2, 92.8 ext{ (totals)}$; $28.9, 28.4, 34.2 ext{ (GDP)}$

  • Purchases of non-financial assets: $7.8, 7.8, 7.2 ext{ (totals)}$; $2.4, 2.4, 2.6 ext{ (GDP)}$

  • Total cash payments: $100.0, 100.0, 100.0 ext{ (totals)}$; $31.4, 30.8, 36.8 ext{ (GDP)}$

• Notes: a Government finance statistics data, fiscal years ending 31 March; b figures may not add up due to rounding.

Table 7.2: Functional composition of public expenditure (1994, 2005, 2016)

• Scope: Items as % of total and % of GDP; based on Government Finance Statistics data (fiscal years ending 31 March).

• Key totals and shares (approximate):

  • General public services (subtotal): $27.7, 30.6, 24.6 ext{ (total)}$; $9.1, 8.8, 8.6 ext{ (GDP)}$

  • Of which: Public debt transactions services: $13.5, 10.8, 8.5 ext{ (total)}$; $4.4, 3.1, 3.0 ext{ (GDP)}$

  • Protection services (subtotal): $14.6, 14.4, 12.8 ext{ (total)}$; $4.8, 4.1, 4.4 ext{ (GDP)}$

  • Defence: $6.5, 4.8, 2.9 ext{ (total)}$; $2.1, 1.4, 1.0 ext{ (GDP)}$

  • Public order and safety: $8.0, 9.6, 9.9 ext{ (total)}$; $2.6, 2.8, 3.4 ext{ (GDP)}$

  • Economic services (subtotal): $12.4, 8.4, 11.2 ext{ (total)}$; $4.1, 2.4, 3.9 ext{ (GDP)}$

  • Of which: Transport: $4.0, 3.5, 4.8 ext{ (total)}$; $1.3, 1.0, 1.7 ext{ (GDP)}$

  • Of which: Communication: $1.4, 0.4, 0.1 ext{ (total)}$; $0.5, 0.1, 0.1 ext{ (GDP)}$

  • Of which: Environmental protection: $0.7, 0.8, 0.2 ext{ (total)}$; $0.3, 0.1, 0.1 ext{ (GDP)}$

  • Social services (subtotal): $45.3, 45.9, 50.6 ext{ (total)}$; $14.8, 13.2, 17.6 ext{ (GDP)}$

  • Housing and community amenities: $3.5, 3.5, 4.6 ext{ (total)}$; $1.2, 1.0, 1.6 ext{ (GDP)}$

  • Health: $8.9, 9.3, 11.4 ext{ (total)}$; $2.9, 2.7, 4.0 ext{ (GDP)}$

  • Education: $18.3, 18.3, 18.8 ext{ (total)}$; $6.0, 5.3, 6.6 ext{ (GDP)}$

  • Social protection: $13.0, 13.0, 13.4 ext{ (total)}$; $4.2, 3.7, 4.7 ext{ (GDP)}$

  • Recreation, culture and religion: $1.5, 1.8, 2.4 ext{ (total)}$; $0.5, 0.5, 0.8 ext{ (GDP)}$

  • Total expenditure: $100.0, 100.0, 100.0 ext{ (totals)}$; $32.7, 28.8, 34.9 ext{ (GDP)}$

• Notes: a Government finance statistics data, fiscal years ending 31 March; b figures may not add up owing to rounding.

Figure 1: What did government spend money on in 2021/2022? (Economic vs Functional classifications)

• The chart distinguishes expenditure by two axes:

  • Economic classification (left): Compensation of employees; Purchases of goods & non-financial assets; Other expenses; Interest; Grants; Subsidies; Social benefits; etc.

  • Functional classification (right): General public services; Education; Social benefits; Interest; Grants; Subsidies; Social benefits; etc.

• Key observations from the 2021/2022 data (R billion):

  • General public services and education are major functional categories by expenditure.

  • Health and social protection are sizeable components within social services.

  • Defence expenditure is present but comparatively smaller.

  • The total expenditure across all categories is substantial (on the order of trillions of Rand; exact total in the figure is shown as the aggregated sum).

• Notable category totals (illustrative):

  • Education: approximately $431.0$ billion in the year shown.

  • General public services: approximately $565.2$ billion in the year shown.

  • Social protection: approximately $267.8$ billion (or in the same region, depending on the year/month shown).

  • Health: a major component within the social services block (significant but not always the largest one).

  • Total government expenditure in the year is shown as a large aggregate value (around $2{,}187.0$ billion in the table/chart).

• Note: Values above are taken from the slide table/figure captions; rounding may apply in the source.

SA Spending in Context: Key patterns and interpretations

• SA Government spending by sector shows a heavy emphasis on social and human development priorities.

• Military expenditure tends to be a relatively small share of general government expenditure across the time horizon shown.

• Education expenditure is a central priority, with substantial shares of total expenditure and a relatively large allocation among social services.

• Health expenditure remains important and grows as a share of the social services block over time.

• The data highlight the distribution of spending across General Public Services, Defence, Public Order and Safety, Economic Services, Social Services (including Health and Education), Housing, Environment, and Recreation.

• The broader context (as shown in the slides):

  • SA is described as a middle-income country with both LMIC and HIC features, facing big gaps in policy instrument capacity and a need to do more with less due to tax revenue constraints and liquidity pressures.

  • Human rights considerations, informed by past experiences, are positioned as a guiding ethical/constitutional context for expenditure choices.

  • The National Development Plan (NDP) context (2030) frames long-run spending goals.

South Africa Today – A Summary (interpretive take from the slides)

• Spending profile: big budget with a strong priority on schools (education).

• Healthcare spending and provision: relatively low or constrained relative to other priorities.

• Defence: small expenditure by international standards.

• Context: MIC economy with features of both LMIC and HIC; large gaps in policy instrument capacity; demographic growth increasing demand for government support.

• Ethical/practical implications: human rights considerations and historical context inform spending priorities and legitimacy of allocations.

• Key takeaway: SA must do more with less, balancing growth needs with fiscal sustainability and equity.

Spending Types: Current vs Capital Expenditure

• Current expenditure (recurrent spending): focuses on immediate, direct requirements

  • Wages (salaries, benefits)

  • Operations (goods and services required for day-to-day functioning)

  • Debt costs (principal and interest payments)

  • Transfers (subsidies, pensions, grants, etc.)

• Capital expenditure (investment spending): focuses on future-oriented and indirect requirements

  • Infrastructure (e.g., roads, buildings, utilities)

  • Equipment (durables, machinery)

  • Investment (long-term capacity expansion, research, etc.)

• Why it matters: current expenditure sustains services today; capital expenditure builds capacity for future growth and development.