ECONOMIC

PUBLIC SECTOR DEFICITSThe economic programs adopted or proposed by the British, Italian, andFrench authorities, as well as some others, during 1976 all stressed the needto stabilize the growth of the public sector and to reduce budget deficits.In most of these countries it was felt that both inflationary tendencies anddisincentives to private sector initiatives were closely linked to the fact thatthe longer-run trends and the past years of inflation and recession hadled to an excessive growth of government expenditures. The expenditurelevels that have resulted are not expected to be sufficiently reduced as recessioneffects wear off. During 1976 government efforts in a number of countrieswere therefore largely concentrated on achieving immediate cuts inpublic expenditures as well as better longer-run control of the governmentsector. The focus on expenditure policy was owing in part to the fact thatin a number of countries it was felt that marginal tax rates were approachingeffective limits. In Britain and Italy efforts were also directed specificallytoward reducing the very large public borrowing requirement, since financingof the deficit during the year involved a high rate of monetization, thusgiving impetus to inflationary expectations and, toward the end of theyear, to rising nominal interest rate levels. The latter lessened the effectivenessof the governments' policies directed toward increasing private investmentdemand.By itself the growth of the public sector does not necessarily imply a lossof vitality in the economy. In fact at times there is a perceived need for theexpansion of certain public sector activities, such as infrastructure investment,which while leading to a growing absorption of resources by thepublic sector sustain or increase the vitality of the private sector. Germanyis a good example of this proposition. If the public sector provides the typeof services the public desires and is willing to pay for, there is no loss ineither productivity or private incentives. However, if public sector servicesare such as to cast doubt on the willingness of the public at large to pay forthem, they imply an increase in the tax burden that the public would bereluctant to bear. In such a case the struggle between business and laborabout the distribution of net income could be exacerbated. Such strugglesinevitably lead to inflationary pressure and to a loss in efficiency for theeconomy at large. In this sense the growth of the public sector may beseen as inhibiting growth in the economy.The closest link between transactions by the public sector and their effectson the overall economy is the direct claim on output and labor that derivesfrom government spending on goods and services. A large part of suchspending is concentrated on consumption or on investment in areas thatmay not necessarily reflect an optimal use of resources. One example is extensivegovernment aid to ailing sectors of industry or individual firms,when aid directed at phasing out such activities might represent a better111