An Analysis of Public Expenditure Dynamics and Public Sector Efficiency in the EU-27*

We examine the relationship between public sector efficiency and government spending, to assess public resource management across the 27 European Union countries. Specifically, we analyze the growth of public expenditure in relation to outcomes across various public sector performance (PSP) indicators. We compute government spending efficiency using Data Envelopment Analysis (DEA) to subsequently assess the relationship between efficiency and the growth rate of public expenditure. Our findings suggest that higher efficiency can be achieved without proportionally increasing public spending, both in total expenditure and in specific areas such as social protection, economic affairs, education, healthcare, and public services. Indeed, with overall input efficiency scores between 0.54 and 0.88, with the same level of outputs, input could increase around 12%-46%. Additionally, public spending tends to rise during recessions, while it decreases with higher levels of human capital and income indicators. Finally, some countries, like Austria, Croatia, Denmark, France, Greece, Hungary, Poland, and Sweden, tend to appear more frequently at the efficiency frontier. • DEA shows outputs (Public Sector Efficiency indicators) could rise 13-23% with same level of government spending (COFOG). • Efficiency growth relates negatively to public expenditure growth. • Human capital reduces spending growth across key public sectors. • Results challenge Wagner’s Law in several expenditure categories like social protection, education, healthcare, economic affairs and public service provision. • Most efficient countries include Austria, Croatia, Denmark, France, Greece, Hungary, Poland and Sweden.