Can the Public Sector Revive the Economy?

The public sector's share in domestic output has stagnated since the late 1980s, its share in capital stock has fallen since 1990, and employment has contracted by 10% from the mid-1990s. Why has it fared so poorly even as its financial performance has improved? This paper argues that fiscal orthodoxy has throttled government borrowing for investment, and competitive politics has disallowed rational pricing by public utilities and recovery of user charges. If these constraints are relaxed by suitably adjusting fiscal deficit targets to accommodate the rise in input costs, and the prices of public utility services are adjusted for inflation, the public sector can revive the economy. Growing public sector enterprises with financial surpluses could also accommodate some political-economic demands.