The Theory on Expenditure Allocation

The economic theory to help address how much to spend on safety nets is the same as for other forms of government expenditure the marginal benefits of different types of expenditure should be equal to each other and to the marginal costs of raising public funds. 

In his classic treatise, Okun (1975) provides an intuitive explanation of what he refers to as the leaky bucket used to transfer money from better-off taxpayers to poorer ones. He enumerates the leaks as administrative costs, reduced or misplaced work effort, distorted saving and investment behavior, and possible changes in socioeconomic attitudes. Okun s idea of a leaky bucket is often cited by those who characterize transfers as costly and appropriate for only a small policy role, but Okun s comments on the size of the leaks in the bucket suggest that their magnitude is fairly modest, which recent research on safety nets in developing countries largely confirms. 

Administrative costs. These are the costs to the government of tax administration and to taxpayers of such items as recordkeeping. Okun deems that these are easily measured, are subject to policy control, and amount to only a few percentage points of overall costs at most. Experience in developing countries confirms that safety net programs can be run well for modest administrative costs a useful rule of thumb is roughly 10 percent of overall program costs (see chapter 9 for more on the topic). 

Work effort. Okun (1975, p. 99) notes that the literature shows virtually no effects on the amount of work effort of the affluent, a limited effect of transfers on the work effort of secondary earners in low-income households, and virtually no effect on low-income households primary earners. A much greater effect can be feund in tax avoidance behavior by corporations shifting remuneration and benefit packages in ways that reduce their tax liabilities. As the synopsis of labor disinoentive effects in chapter 5, section 2, indicates, recent experience with safety nets shows that well-designed programs have modest and manageable labor disincentives. 

Socioeconomic attitudes. These are a less tangible concern and relate to the effort to balance the benefits of sooial inclusion against possible harm to the work ethic. Socioeconomic attitudes are a recurring theme in social assistance policy for all countries. 

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