Theoretical approach to the subject

The deliberations contained in this part of the paper should start from a statement that economic growth in an intensive economy, ensues from the growth of productivity of capital and a growth of work per-formance. The growth in both productivity and performance is related to quantitative and qualitative changes in the whole sphere of produc-tion and distribuproduc-tion and in terms of demand, investments and also consumption. The level of consumption reflects the state of achieve-ment of the goal of economic manageachieve-ment, translating directly into the level of welfare in a given country.

The notion of public transfers is used here in its general meaning concerning the redistribution of income within the market system through the public finance system. Public transfers concern the nature of the public finance, understood as processes for accumulating and distributing public means. The transfers are related to the performance of the redistributive, allocative and stabilizing functions as part of the public finance system [Musgrave and Musgrave, 1984, pp. 319]. The redistributive function affects, firstly the change in the structure of income and then, indirectly, production. The effect of the allocative function primarily concerns the structure of production. Public trans-fers forged within the frameworks of the fiscal policy concern these changes in the structure of distribution and generation of the domestic product. In this article I will focus on the expenditure consequences of public transfers.

The evaluation of the effect of public expenditures on economic growth is not obvious, it has changed with the evolution of the eco-nomic thought. The direction and consequences of the redistribution of income and, ultimately, public spending depend on the growth the-ory adopted for the analysis. The consequences of an increase in the public spending, whether beneficial, neutral or adverse for economic growth, make the difference between the different economic schools (neo-classical, neo-Keynesian, or the theory of the real business cycle).

Public governance methods were intensively researched into and developed at the turn of the 1890’s of the 20^th century and in the 21^st century. The quality of the public spending was the highlight. Then, a new idea of the effect of public spending on economic growth was developed [European…, 2002, pp. 102103]. The basic statement has not yet resolved the core dilemma of the effect of the spending on growth: programs implemented using public funds can stimulate eco-nomic growth in many ways. Thanks to public expenditures, firstly, public goods are supplied and secondly, these constitute a source of products and services aiming to correct the imperfections of the mar-ket and improving performance. Also some social spending can con-tribute to the improvement of economic performance, provided, how-ever, that the size of the expenditure remains at a reasonable level. The classification of public spending, put into four categories, is essential for concluding the consequences of the expenditures for growth. The effect of each of the four categories of expenditure on performance and in consequence, economic growth is shown in Figure 1.

Figure 1. Performance of public spending broken into the four categories

Source: Public finance in EMU-2002, ECFIN 2002.

Category 1 (the red line, AF) represents payments on the account of interest: the cost of servicing the debt. This spending always has an adverse effect on growth and employment, the use of resources for other ends should be, usually, more productive. Category 2 (the green line, AE) consists of old age and disability pensions, the spending on public consumption and salaries for public sector employees. This category of spending has a beneficial effect on the growth up to a cer-tain, relatively high, level but if the spending is excessive, e.g., as a result of too fast growth of salaries in the public sphere, this can have the opposite effect. A high level of spending can displace other performance-improving expenditure. Also, a very high level of spend-ing on retirement benefits can have an adverse effect on savspend-ings and the accumulation of capital. Furthermore, both high and early retire-ment benefits can have an adverse effect on employretire-ment. High costs of labour in the public sector can have an adverse effect on inflation and a measureable effect on the operation of the labour market (the effect of follow-up in the negotiation of salaries, etc.). Category 3 (the blue line, CD) includes welfare spending on the disabled, preventing social exclusion, housing, transfers to the unemployed and family

allowances. The public expenditure on this account can have a benefi-cial effect on performance, provided that they are kept within reason-able limits. A very high level of spending can have an adverse effect on growth because of the likelihood of permanent addiction of the beneficiaries to public aid and related moral dilemmas. A reduction of the public spending in this category to less than a minimal level of spending is also detrimental to the economy. Reducing this spending to less than the minimum level limits opportunities for participation in the labour market, leads to extension of the area of extreme poverty and hinders re-integration of the excluded. A very low level of trans-fers for the prevention of unemployment can reduce the performance of the economy by restricting job-seeking activity and can translate into a less than optimal division of labour. Category 4 (the black line, AB) includes the spending on education, health care, active forms of unemployment control, research and development and public invest-ments. This group of expenses fully promotes the positive dynamics of the economy. Only the exceeding of an exceptionally high level of spending can create a threat of adverse consequences, though empiri-cal validation of the effect is difficult because it concerns a level of spending that has never been seen in European countries.

The idea illustrated in Figure 1 uses the detailed structure of public spending for analyzing the effect of spending on economic growth.

The basic theories of growth focused on analyzing the global size of the public spend. Differentiating the types of spending leads to new conclusions that are different than the ones drawn within the frame-works of the basic theories of growth.

2.2. Effects of spending on growth within a given time