Spending smarter: effective allocations in public investment

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Hello and welcome to this OMFIF podcast. My name is Andrea Correa, Senior Economist at the Economic and Monetary Policy Institute, and today we are finalizing the series of five podcasts we're running with our EY partners in the project called The Future of Public Money. In the last podcast, we explore how governments can prepare for crisis, invest in outcomes, and make their financial choices more sustainable, impactful, and politically appealing.

 

In today's episode, we aim to explore how governments can shift from simply spending more to spending smarter. Drawing on new insights from the IMF and fresh empirical work from OMFIF and EY, we examine why productive public investments remain so elusive, what distinguishes high-performing public institutions, and how fiscal rules can evolve to better support high-productive investing. I'm here with Mark McDonnell, Global Public Finance Management Leader at EY, and Galin Scheer, Senior Economist at the Fiscal Affairs Department of the IMF, and today we're going to unpack the practical reforms finance ministries can take, from improving allocative and technical efficiency to building credible evaluation systems, and offer next steps that policymakers can act on immediately to drive better long-term protocol. Mark and Galin, thank you so much for being here today with us. I would like to start maybe highlighting that both publications, the IMF Fiscal Monitor of October 2025 and the OMFIF and EY report on Investing for a Productive State, highlight the importance of talking about more productive allocation of public money.

 

So maybe, Galin, starting with you, the IMF's Fiscal Monitor highlights the importance of shifting the composition of public spending to improve both technical and allocative efficiency. So maybe if you can unpack a little bit more this concept and why is this such an urgent priority to finance ministries today?

 

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There are at least two reasons why governments need to spend more efficiently. The first is that public finances are under strain all around the world. Take public debt, for example.

 

Globally, public debt is high and rising fast. It is set to exceed global GDP within the next four years. On top of this, we are seeing strong pressures to spend more on health and pensions, given aging populations, on defense, given security concerns, and on debt servicing costs, given the sharp rise in interest rates after the COVID-19 pandemic.

 

In this constrained fiscal environment, governments really have no choice but to deliver greater value for money. The second reason why governments need to spend more efficiently is that prospects for economic growth have weakened around the world over the last three decades. Revitalizing economic growth would not only improve living standards, but also ease fiscal pressures by increasing public revenues.

 

And that's why in our recently published Fiscal Monitor report, we examined how governments could use their existing spending budgets more effectively to increase value for money and economic growth. We call it spending smarter.

 

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Thank you. Mark, I know that the report that we brought together also highlights a little bit of this, yeah, the importance of starting about these types of allocations. Do you want to tell us a little bit of why did you think it was an urgent matter to talk about?

 

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Well, for many of the same reasons that Galen has just outlined. So certainly at the economic and at the fiscal effectiveness level, we think that the exact same reasons are in play. The IMF paper does an exceptionally very, very good job, obviously, but it's a robust empirical assessment of both technical and allocative efficiency.

 

What I would say to you is that, and again, this is some conclusion that, Andrea, we shared with OMFIF about a year ago as well, is that the administrative structures of the state around issues of public financial management, while always available for improvements at the margin, they are pretty good. And so when we think about the future of public money, as we have been doing, I think it is a little bit less now about not necessarily the technical efficiency, but the institutions of public financial management. They're pretty robust.

 

The evidence, though, and again, we had this conclusion last year, is that we still see rising debt to GDP ratios. We still see rising and potentially accelerating debt levels. And as Galen has suggested, in the foreseeable future, that could equal the entire output of the global economy.

 

Undoubtedly, that is a result that needs to be addressed. And so what we're trying to achieve in this year's work is that shift that basically says it's okay for us to now put what we've characterized as the production function of the state into the mix of the debate about what we should and potentially can be doing about this. And I would submit to the audience that it's one thing to kind of argue on a subjective or on a theoretical or a conceptual basis in favor of that.

 

It is quite another to put some forecast, to put some evidence, some real empirical evidence behind that. And both the IMF and our work together is at least a start in that direction. And what that evidence at least suggests is that a focus on allocative efficiency in favor of productivity, in favor of economic growth, in favor of a more effective and efficient allocation and expenditure of state monies is, in fact, something that we should all be very, very interested in, that we should advocate for, and that it could actually have longstanding social value and economic value as well. And that's obviously what the purpose of public money is in the first place.

 

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Thank you, Mark. I think it's very interesting to see like both reports have done some sort of empirical work to prove that this is actually some change that we have to start seeing. But there's also something that we saw and is that many countries still struggle to build credible systems that actually evaluate this public spending and like how it is actually going to be invested in something productive or if the returns that we actually want are there or not.

 

So why has establishing these comprehensive evaluation frameworks proven so difficult and what will be a realistic first step to start thinking about this and like improve it?

 

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So evaluating public spending requires a lot of expertise and independence. And we actually tried to evaluate the composition and efficiency of public spending in our fiscal monitor report. Let me tell you what we found.

 

First, we found that many countries have significant scope to reallocate public spending towards areas that enhance economic growth. For example, the share of spending allocated to public investment has fallen by around two percentage points over the last three decades in both advanced economies and emerging markets. The share of spending allocated to education has not increased and has even fallen on a per-pupil basis in emerging markets.

 

Our second main finding is that almost all countries could increase the efficiency of their public spending. We estimated the efficiency of public spending for 174 countries since 1980. We did this by comparing the outcomes that they were able to achieve in infrastructure, education, health, and research to the outcomes that other countries achieved with similar levels of spending.

 

We found that countries could get 30 to 40 percent more value for money by adopting the practices of the best-performing countries. We're making our data set available with these efficiency estimates for every country, and we hope this will be a helpful resource for researchers and policymakers. We also found that countries could boost economic growth substantially by reallocating spending and by making spending more efficient.

 

For example, reallocating public spending towards education could lift economic output by three percent in advanced economies and six percent in emerging markets over the long term. And making spending more efficient could raise output by another one and a half percent in advanced economies and up to seven and a half percent in emerging market and developing economies.

 

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Mark, do you want to add something?

 

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I mean, I do. Just listen to those statistics and listen to who they come from. This is the IMF.

 

And Galen, I think you just made a reference to data and analysis that goes back to 1980. This is an incredibly robust examination, and the data are unequivocal. To me, it's also important for us, and Andrea, you and I co-authored a piece that came out six weeks ago or something like that, kind of about the political economy of really what is it that ultimately policymakers, elected officials in particular, are concerned about.

 

And I think our subtitle was about the rules of the game in terms of the allocation of public money. And the current rules of the game are about expenditure levels. It is a good thing in political terms to be seen to be spending more money.

 

And it's less clear that it is a political good to be able to demonstrate what you're achieving for that. And I think both the IMF and ourselves together argue that that's just, you know, in the face of this evidence, it is just no longer sustainable for us to act in that way. We have to change the rules of the game.

 

Of course, expenditure levels are very important, but it really is about the value conferred by that. Every public dollar is really a purpose dollar. It is spent, it is allocated legally, it is appropriated on the basis of trying to achieve a social outcome.

 

And if we're not more concerned about the social outcomes and seeing the necessary growth and so forth, we end up in a circumstance like Galen's research has been able to demonstrate. And that is that we have sometimes very significant efficiency gaps where the allocation of that money isn't anywhere near to its maximum or optimal sort of impact. How is it that we can accept that anymore?

 

In a constrained environment where we do have rising debt levels and so forth, we must, we must permit our elected officials to change the rules of the game. We must expect more than just expenditure levels. We have to get to the outcomes and the impacts that are achieved.

 

And the last thing that I'll say on that is that fortunately, and Galen, you suggested that it's a very difficult thing to do, but to link a financial outlay to a non-financial outcome can be enabled increasingly by modern technology. And we didn't used to have that. Back in 1980, we didn't have that capability.

 

It really was administratively very, very difficult to get that connection. Well, now that's no longer the case. And so we must, again, permit ourselves to connect these two things because ultimately that's what the objective is.

 

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Yeah, that's true, Mark. And I think that also, this also links back to some of the findings on no report on the side of the political economy, but also the fact of the changes in the mindset for the decision makers. So it's not just about like the elected decision makers, but also like the institutions.

 

So because institutions need to start really embedded this kind of thinking and like how we are actually like moving this investment into translating into outcomes. So from your research, for example, Galen, what concrete mechanism distinguish like high performing public institutions in this sense, and how do these mechanisms translate into better investment outcomes?

 

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Our analysis finds that countries with stronger institutional frameworks spend more efficiently and allocate more of their spending to items that enhance economic growth. So institutions are critical, as you mentioned. Countries with lower levels of corruption, stronger rule of law, and more effective processes for managing public investment tend to spend more efficiently.

 

If public investment projects are planned well, appraised properly with cost benefit analyses and selected technocratically based on their merits, then every dollar of public investment spending can deliver more and better outcomes. I want to give the example of the country of Togo. Togo implemented comprehensive public investment management reforms in 2016, including cost benefit analysis for new projects, multi-year budgeting and procurement reforms.

 

In subsequent years, the investment efficiency in Togo improved by five percentage points, which is quite substantial. Another tool to optimise public spending is spending reviews. Following spending reviews, countries often successfully reduce their public wage bills and they increase the efficiency of their spending.

 

Good spending reviews are those that are integrated early enough into the budget preparation cycle to inform spending decisions. And on this, I can give the example of the Slovak Republic. The Slovak Republic launched spending reviews in 2016, and these reviews covered about two thirds of public spending.

 

These reviews have identified potential savings of seven percent of total government spending, which is very large. More countries could benefit from adopting spending reviews.

 

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I also want to talk about more concrete examples of what we call potential productive allocations of public money. In this case, for example, Mark, the empirical work that the EY economic advisory team put together into the modelling gave us some evidence that digital and technological investments yield more substantial returns than, for example, traditional infrastructure. So do you think there's scope there for fiscal rules to differentiate between these types of capital investments?

 

And if so, how might that be done in practice?

 

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Yeah, I don't know that we contemplated changes to the fiscal rules associated with that, but that is an interesting hypothesis and perhaps something that we can do in the future. What we were trying to do there, and again, I think the evidence kind of speak for themselves in a positive way, is to take on the challenge of trying to adjust the production function of the state. And at the moment, much of the expenditure in the state goes to support essentially labour based and kind of process based allocations.

 

And that's increasingly one can introduce, you know, business technologies and, you know, like artificial intelligence or, you know, other forms of technology that can potentially enhance the efficiency. The real question is to what degree? And if in making such investments, do we actually potentially change the long run fiscal position of our government?

 

And so in our data, what we did is we actually so we basically we took OECD countries, primarily in Western Europe, in the in the study that's published. And we said there's a couple of key challenges that are that are taking place. One of them is that it's actually very difficult to replace the labour as it retires, as there is a natural sort of demographic shift.

 

Question mark, what if we took the value of that labour expenditure shift and invested it into technology? And the results, again, speak for themselves. What you end up with is an outsized impact on productivity, both inside the public sector, but also in private sectors, that that leads not just to productivity enhancement, but quite clearly to economic growth.

 

And then you say, well, let's circle that back and see what the fiscal impact is. And again, not surprisingly, over time, when you have both productivity enhancement, long term economic growth, it essentially enhances our ability to find everything else held constant to find enhancements to our long run fiscal position. And again, the evidence suggests that that's the case.

 

So now the next step is going to be what exactly, what specifically do we recommend to governments to try and follow as strategies? And again, the IMF work supports a similar sort of conclusion. We talk about the changes to public administration.

 

We talk about the changes to the design of delivery systems and so forth. Again, enhanced increasingly by technology. That must be the future of the production function of the states that we live in, because those are the ones that essentially you end up with the fiscal result that you want.

 

You end up with the service enhancements that citizens and service recipients are seeking. And you change the nature of what that future, the investment mindset, you change it away from just expenditure. You put it into an investment mindset and you give our elected officials and other decision makers the permission to seek the future as opposed to, in a sense, defend the past.

 

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Thank you, Mark. Glenn, do you have something to add on that?

 

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Yes, I'd like to agree with Mark that digitalization of public administrations can improve service delivery and streamline operations and improve efficiency of spending. We recommend that electronic payment for salaries and social assistance can reduce cash management costs of governments. Digital processes for procurement can also generate data that can be used to reduce order costs and flag irregular payments.

 

So there are strong reasons to think that more digitalization of public administrations can improve service delivery and efficiency. I also wanted to comment on the very interesting question you raised on fiscal rules. Generally, the aim of fiscal rules is to prevent governments from racking up too much debt.

 

Without a rule, a government might give in to short-term incentives to borrow excessively, either to spend a lot or to keep taxes low. And well-designed fiscal rules do tend to be effective at preventing buildups of public debt. However, fiscal rules have not been effective in changing the composition of public spending.

 

For example, many countries have tried golden rules to promote public investment. Golden rules do not restrict borrowing as long as the borrowing is used for public investment. The downside, of course, is that governments then tend to reclassify various types of spending, like consultancy services, as public investment, and then they go and borrow too much.

 

So generally, fiscal rules are not considered to be the right tool to change the composition of public spending. Instead, to ensure that public investment is going to the right projects, like digitalization that you mentioned, countries should evaluate and upgrade their processes for project appraisal and selection. Independent reviews of projects can help mitigate political influence.

 

Countries can also do a better job of including maintenance funding in project budgets. It's often cheaper to maintain an asset than to replace it with a new one.

 

(22:21 - 23:17)

We're going to violently agree with each other, I think, on everything. But let me just kind of highlight one additional thing that our paper concludes in this regard, and that is to leverage in and, I think, leverage up the role of capital market players. The investors in public debt have got a voice to potentially increase their influence positively in making sure that the investments that are actually made stand the test of rigor that Galen has just outlined.

 

And so, again, we think that there is decidedly an opportunity for both the investor and the investee to rethink that relationship in the promotion of an outcome that is essentially good for all.

 

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Yeah, I completely agree as well. And I think there's a lot of things on different topics and angles that we can think about this topic and that were exposed there in both of the research. But I kind of wanted to close with a concrete next step that you would like to give to a finance minister.

 

If a finance minister wanted to act on this research or this topic immediately, what would be one step that they could take this week to spend smarter and move towards a more productive public investment strategy?

 

(24:00 - 25:11)

Andrea, you asked for one step. Let me give you two. Two simple and powerful steps that could be taken.

 

The first is to strengthen public institutions to boost spending efficiency. For some countries, that might mean establishing an anti-corruption agency or commencing a review of governance practices. For other countries, that might involve increasing transparency by auditing and publishing financial statements for the government and state-owned enterprises.

 

For other countries, it could mean reforming public procurement processes to make them more open and competitive. So that's one step. The second step finance ministers could take is to create fiscal room for growth spending, like investment in physical and human capital.

 

Many governments can find room by reforming their unsustainable pension systems, by reducing the premium of public sector wages over private sector wages, by eliminating ghost workers in the public sector, by reforming tax loopholes, or by better targeting social assistance programs to those that need them most.

 

(25:12 - 25:17)

Thank you, Willem. I think those are two very powerful next steps. Mark?

 

(25:18 - 27:00)

Yeah, I think in a similar way, and obviously there's a list of about as long as your arm about the specific things that people can do. To me, it is fundamentally about the link between the allocations made, so the investments made, and the impacts actually achieved. And there is nothing wrong with being able, first of all, to connect those two things, because we're not just about the expenditure.

 

We are much, much more about that long-term impact. And there is nothing wrong with continuing to see an opportunity for enhancement to that impact. And I think too often, budgets assume that it's just the expenditure that leads to the impact.

 

Well, not at all. And so we kind of come full circle back to where the discussion started. Let's actually focus on the impact before we focus on the expenditure.

 

Let's allow ourselves to put in play that production function that gets us there. That will release opportunities for efficiency. It will certainly enhance the ability to make smarter decisions to lead to better long-term results.

 

And as both the IMF and OMFIF and EY are starting to demonstrate empirically, the results can be a more sustainable fiscal position. And over time, that is the way that we can secure a valuable, sought-after, socially acceptable and productive future of public money.

 

(27:02 - 27:37)

Thank you, Mark. And thank you, Glenn, as well. I think that this topic is very fascinating.

 

And I think, obviously, both reports have a lot of good insights. And I think that is food for thought out there. And I'm sure that this is a topic that is going to keep being one of the highlights for next year, as it was in this year.

 

So I'm very glad that we could spend this half an hour together. And yeah, if you have any final thoughts.

 

(27:39 - 28:11)

It was a pleasure talking with you both today. And thank you very much for the opportunity to share some of the findings from our October fiscal monitor report. I just want to close by emphasizing that spending smarter is more than a fiscal tactic.

 

It's a growth strategy. And we demonstrated that in our report. By prioritizing efficiency and channeling resources wisely, countries can strengthen public finances and build resilience and create a more prosperous future.

 

So thanks very much.

 

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Thank you, Mark. I think that also summarizes very well the report that we wrote together. I don't know about you, but yeah, we are on the same line.

 

So we agree with you, Glenn. And yeah, it was a pleasure to spend this time together. And for our listeners, just keep an eye out for next year's work about future public Thank you for joining us for this edition of the OMFIF podcast.

 

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