Chapter 7

Question 1 Discuss and contrast the various macro and micro models of public sector growth &
critically argue which model best applies to the growth of the public sector in South Africa.

Macro Models

 Explain broad patterns of government expenditure with regard to aggregate variables such
as GDP.
 These models are:
1. Wagner and the stages of development
2. Peacock and Wiseman’s displacement effect
3. Melzer-Richard hypothesis.

The stages of growth models of Wagner

 Structural change during development from a subsistence to an industrialised economy

influences the extent of public spending.
 Public spending priorities in three stages of development:
- Nature of government expenditure in the initial stage of development: Legal and
administrative institutions that have been established to reduce the cost of business.
Expenditure to initiate capital formation in the economy. Basic infrastructure is most
important.
- Nature of government expenditure in the middle stage of development: Capital
expenditure through infrastructure continues. State involvement in solving cases of
market failure which will occur now.
- Nature of government expenditure in the last stage of development: Capital expenditure
on economic infrastructure declines, but social spending begins to grow in relative
significance e.g. education, health and social security.

Peacock and Wiseman displacement effect

 Social upheavals or disturbances change established conceptions about acceptable tax

burdens and public spending levels.
 In times of crisis, the crisis demands higher state expenditure and thus higher taxes
 Make large increases in government spending possible
 Once the crisis is over, government spending remains high when upheavals end. This is
because taxpayers got used to high taxes and government direct such revenue to new
applications.

Meltzer Richard Hypothesis

 Median voter is the decisive voter in a democracy whose preference determines the winning
party elections.
 Pressure for redistributing income via the national budget would increase if extension of the
franchise changes the median voter to someone whose income lies below the average.
– Median voter then prefers a high tax burden and more redistributive government
expenditure.
 Reductions in labour supply and saving by heavily taxed persons can constrain such
spending.
Micro Models
Focus on the decision-making behaviour of individuals and institutions in the public sector
 Baumol’s unbalance productivity growth
 Brown and Jackson’s microeconomic model
 Role of politicians, bureaucrats and interest groups