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Why do crises go to waste? Fiscal austerity and public service reform

Hugh-Jones, David (2012) 'Why do crises go to waste? Fiscal austerity and public service reform.' Public Choice. ISSN 0048-5829

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In the tight budgetary conditions following the 2008 financial crisis, governments have proposed saving money by reforming public services. This paper argues that tight budget constraints make reform harder by introducing an information problem. Governments are uncertain about bureaucratic departments’ effectiveness. Normally, effective departments can be identified by increasing their budget, since they can use the increase to produce more than ineffective departments can. When budgets must be cut, however, ineffective departments can mimic effective ones by reducing their output. Budget cuts thus harm both short-run productive efficiency, and long-run allocative efficiency. I confirm these predictions in a US dataset. Low marginal productivity bureaucracies reduce output by more than expected in response to a budget cut, and budget setters respond less to observed short-run marginal productivity after cutback years.

Item Type: Article
Uncontrolled Keywords: Bureaucracy; Reform; Signaling
Subjects: H Social Sciences > HJ Public Finance
J Political Science > JA Political science (General)
Divisions: Faculty of Social Sciences > Government, Department of
Depositing User: Jim Jamieson
Date Deposited: 07 Mar 2013 14:36
Last Modified: 23 Dec 2013 10:05

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