Assessing the Welfare Impacts of Public Spending

October 1996 We must diversify and compare results from our methods of assessment, as well as broaden our definition of well-being, to see how public spending policies affect various facets of living standards. An important objective of public spending is to raise household living standards, particularly for the poor. But how can final impacts on this objective best be assessed? Evaluating a policy's impact requires assessing how different things would have been in its absence. But the counterfactual of no intervention is often tricky to quantify. Van de Walle surveys the methods most often used to assess the welfare effects of public spending. In studying the current state of the art she identifies some limitations of current practices and draws implications for best practice in future work. The methods used to assess welfare impacts broadly fall into two groups: benefit incidence studies and behavioral approaches. Both have their strengths and weaknesses. Benefit incidence studies ignore behavioral responses and second-round effects, and simply use the cost of provision as a proxy for benefits received. Behavioral approaches present quite different drawbacks, in attempting to represent individual benefits correctly. A number of recent studies usefully combine both approaches. It is still uncertain whether behaviorally consistent methods actually point to fundamentally different policy recommendations. What can be concluded is that we need to diversify and compare results from our evaluation methods and broaden our definition of well-being, to see how various facets of living standards are affected by public spending. This paper - a product of the Public Economics Division, Policy Research Department - is part of a larger effort in the department to analyze public spending and poverty issues. The author may be contacted at dvandewalle@worldbank.org.