Governments are responsible for the provision of various goods and services to their populations. Some of these are under their exclusive jurisdiction, for example the justice system, whereas others, like healthcare, may be provided by both government and private entities. In addition to providing services, governments also strive to redistribute income across society, through social benefits and subsidies. The level of public provision of goods and services varies significantly between countries depending on their policy choices, current priorities and their political systems and traditions. Across OECD countries, government expenditures are primarily allocated to the provision of public services and income transfers. Government expenditures tend to be more stable over time than government revenues, which are more dependent on economic cycles. Through public spending, governments provide people with a reliable safety net, guaranteeing them certain entitlements and protecting them from economic fluctuations.

Governments are responsible for the funding or direct provision of a wide array of services and activities, such as healthcare, education and justice; guaranteeing public order and the safety of civilians; and representing the country internationally. Governments’ expenditures by function provides an overview of the use of public resources in key areas and sheds light on government priorities and preferences for delivery modes (i.e. fully public or a combination of public and private). Changes in the structure of public spending can be driven by policy choices, as well as by socio-economic trends such as demographic changes, business cycles or shocks such as the COVID-19 pandemic.

The COVID-19 pandemic showed the importance of robust and agile health and social protection systems to help weather crises by protecting people’s lives and preserving living conditions. Social protection and healthcare are on average the largest government spending categories in OECD countries, and increased in significance during the pandemic. Meanwhile, demographic trends, such as higher life expectancy and low fertility rates, add further financial pressure on health and social protection systems, increasing demand for more and better medical care, as well as for pensions and other types of social aid and support (OECD, 2021).

In economic terms, effectiveness measures the extent to which an activity meets its goals. Cost effectiveness, i.e. the ratio of an input to an intermediate or final outcome, reflects the relationship between resources spent and results achieved, and is critical for evaluating the success of government policies. The education and healthcare sectors have sufficiently well developed and internationally standardised measures of inputs and outcomes to allow their cost effectiveness to be meaningfully compared.

Another way of classifying public spending is by economic transactions, for example employee compensation, financing subsidies, cash transfers such as social or unemployment benefits, and intermediate consumption (i.e. procurement of goods or services from the private sector that are used in government production). This classification is distinct from government expenditures by function, which groups expenditures by thematic categories (e.g. health, education, defence, etc.), as it distinguishes broader categories of government’s production function. By considering both types of classifications, it is possible to gain a more comprehensive understanding of government spending patterns and their impact on the economy.

Depending on their administrative structure – to a large extent based on whether they are administratively organised as a federal or unitary countries – central, state and local governments are responsible for different functions and have different spending responsibilities. There are several government functions that require co-ordination across government levels and shared funding. The need to improve the quality and efficiency of government spending has confirmed sub-central governments as important players in the implementation of public policies. Indeed, sub-central governments could be considered better equipped than central governments to obtain information on local needs and better placed to tailor the provision of public services (OECD, 2022).

Public investment can enhance productivity and promote economic growth, foster societal wellbeing, and support long-term policies. Government expenditures can be considered investments if they are directed towards durable assets like transport and energy infrastructure, healthcare and education facilities, IT systems, defence systems, and intangible assets such as research and development. Government investment often includes purchases needed to implement long-term policies, such as promoting sustainable development by investing in green energy infrastructure.

The fiscal balance is the difference between a government’s revenues and its expenditures. It signals if public accounts are balanced or if there are surpluses or deficits. Recurrent deficits over time imply the accumulation of public debt and may send worrying signals to consumers and investors about the sustainability of public accounts which, in turn, may deter consumption or investment decisions. Nonetheless, if debt is kept at a sustainable level, deficits can help to finance necessary public investment, or in exceptional circumstances, such as unexpected external shocks (e.g. pandemics, wars or natural disasters), can contribute to maintaining living conditions and preserving social stability.

The structural or underlying fiscal balance is the difference between government revenues and expenditures corrected for effects that could be attributed to the economic cycle and one-off events. Removing the effects of economic fluctuations from the figures enables policy makers to identify the underlying trends of economic aggregates and allows them to better assess the sustainability of public finances in the long run. Government revenues tend to decline during economic downturns, as incomes fall. At the same time, public spending tends to increase, as more people claim social assistance or unemployment benefits. Governments may also increase public expenditure to stimulate the economy. All these effects were visible during the COVID-19 pandemic. The structural balance is a measure of the budget balance a government would have with its current policies if the economy was operating at its full potential (“potential GDP”).

Increases in income inequality have been associated with worsening political polarisation and disenchantment with political systems (Winkler, 2019). The global economic situation following the COVID-19 pandemic and Russia’s war of aggression against Ukraine has resulted in high inflation and sharp increases in energy and food prices, which disproportionately affect low-income and vulnerable households and could have long-lasting impacts on people’s wellbeing and living standards. OECD countries are implementing a range of policies to address rising prices and redistribute income between richer and poorer households, such as targeted and non-targeted cash transfers, vouchers and subsidies to households and firms, price control measures, and tax reductions (OECD, 2022). Monitoring changes in income inequality will be key to assessing the effectiveness of such measures.