Beyond that, the “quality” of public finances is very important for growth. It is essential to increase the efficiency of public spending in order to facilitate the redirection of public expenditure towards physical and human capital accumulation with a view to enhancing productivity.
Indeed, evidence for the EU shows that there is room for improvement in public sector performance and efficiency, with gains possible with a public sector of the same size or even smaller. 10 Moreover, inefficiently high levels of public spending imply high taxes and are likely to inhibit potential growth.