The Welfare Economics of Public Sector Targets: Towards an 'Expenditure Constitution'

With the advent of New Labour, numerical targets have become ubiquitous in the public sector. They are used to monitor and assess performance by government agencies; but how helpful are targets if couched only in numerical terms? In this paper, the proposition is that targets must be set in context: targets must be set with reference to a social welfare function. Pressures in 'political markets' are quite different to incentive structures that ensure that targets will maximise welfare. If targets are inappropriate in Paretian terms, welfare loss might be magnified, the more 'successfully' government agencies hit targets. Misallocation of resources is gauged against a Paretian benchmark and illustrated with reference to waiting in the NHS. Analysis of a welfare critique of target-setting suggests a policy rule capable of mitigating distortion.