The optimal composition of government expenditure among transfers, education and public goods

John Creedy, Solmaz Moslehi

Research output: Contribution to journalArticleResearchpeer-review

3 Citations (Scopus)


This paper examines the optimal allocation of tax revenue among a universal transfer payment, a pure public good and expenditure on education. Using a single-period framework, education expenditure raises the productivity of individuals via a human capital production function. The social welfare function is based on individuals' (indirect) utilities. Education creates a substantial fiscal spillover whereby the increase in human capital gives rise to higher labour earnings and thus higher income tax revenue, thereby allowing greater government expenditure on all items than would otherwise be possible. A higher inequality of exogenous ability levels is found to increase all types of expenditure, but only the transfer increases in relative terms. Higher inequality aversion leads to an increase in transfer payments in absolute and relative terms, at the expense of the other two components. However, there is little sensitivity to inequality aversion. An increase in the elasticity of the wage with respect to basic ability leads to lower education spending.

Original languageEnglish
Pages (from-to)41-64
Number of pages24
JournalHacienda Pública Española/Review of Public Economics
Issue number3
Publication statusPublished - 2010
Externally publishedYes


  • Education
  • Government expenditure
  • Public goods
  • Social welfare function
  • Transfer payments

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