Lewis Chapter 3: The Public Sector

The Size of the Public Sector The Australian Treasury definition of the public sector is that it comprises all entities owned and/or controlled by the Commonwealth, state or local governments. There are three main ways of measuring the size of the public sector: by the number of people employed, by the value of goods and services produced by the level of expenditure. It is customary to present each as a proportion of the corresponding total for the whole economy. The majority of public sector employment is in the delivery services, such as education and health, rather than the administration. The impact of the government is greater than this, however, because as well as engaging in production, the government sector uses some of its taxation revenue to make what are called transfer payments to other people. Major forms of transfer payment are age pensions and unemployment benefits. A further form of government expenditure, which does not involve the production of goods and services, is interest paid on the public debt. Arguments for Public Expenditure As public expenditure on goods and services accounts for such a large proportion of GDP, it is reasonable to ask why it is deemed desirable for this large proportion to be controlled by the government rather than by the private sector. The classic argument in favour for public provision of goods and services is the existence of public goods. Public goods have two characteristics: First, once they are produced, it is not possible to exclude people from consuming them. Thus, public goods are said to be non-excludable. Second, one persons consumption of public goods does not reduce the amount available for others.