Waste in Government Expenditures

Posted by Sanjay Vani, Lead Financial Management Specialist

In this period of fiscal crisis and tightening of public expenditure budgets, it is especially interesting to look at the extent to which public expenditures are wasted. It is generally assumed that in developing countries a large portion of public expenditures is lost to fraud, waste, and corruption—as some high-ranking officials have been candid enough to admit. For example, when Rajiv Gandhi was Prime Minister of India, he famously remarked that for every one rupee spent on poverty alleviation programs in India only 15 paise (i.e., 15%) reached the intended beneficiary. But it turns out that wasteful government expenditure is not just a problem of developing countries. Three OECD countries with large economies—the United Kingdom, the United States of America, and Japan—can serve as examples.

Many developing countries suffer from weak accountability institutions, and their progress and reforms are hampered by generally weak capacity.  However, the UK, the US, and Japan do not face such constraints:  they have strong accountability arrangements, including a strong and independent supreme audit institution, free media, a strong civil society, and a large work force of educated and skilled people. Moreover, these countries are not known to suffer the endemic corruption that is common in many developing countries. So the obvious question is, why is there so much waste in public expenditures in the developed world?  I conclude that there are two main reasons:

Other factors also contribute to waste in public expenditures:  lack of “intelligent” information systems able to collate, compare, and connect the dots on a real-time basis, and lack of a rigorous process to challenge departmental budgets and expenditures (imbalance in autonomy and accountability).  Moreover, the sheer size of a department sometimes makes controls that work elsewhere ineffective (the U.S. Department of Defense was reported to claim that it is just too big to audit!).

To conclude:  developing countries do not have a monopoly on wasteful public expenditures. Despite the presence of strong institutions and a watchful civil society, some waste in public expenditures occurs even in developed countries.  Minimizing such waste means thinking beyond prescribing more controls and more audit; instead, it would require new, out-of-the-box thinking on how to devise incentives for the efficient management of public resources.

[1] The quarterly earnings report is a “report card” of sorts for listed companies. It is through these reports that companies let market participants know how well they have performed during the period. Analyzing this information helps investors gauge the financial health of the company and decide whether or not it deserves their investment.

[2] It can, of course, be argued that in the light of the recent financial crisis, which was caused by private sector institutions, we do not dare to draw any inspiration from the private sector. However, the point here is not to promote adopting private sector practice, but to highlight the absence of a mechanism similar to the private sector’s, where the results announced by corporate entities bring an instantaneous consequence.

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