This chapter discusses the rationale or “why” of public sector innovation. Understanding the “why” question is vital because, without a purpose, innovations may not be successful or not worth trying. Innovations benefit nations, organizations, and employees differently, so understanding rationales for innovation is vital. This chapter provides information about rationales for innovation while summarizing the historical background and different levels of analysis. For example, innovations at the national level can increase national competitiveness, job creation, social wellbeing, economic development, and growth. Innovations in public organizations can increase the quality of public services and citizen satisfaction with these services. Innovations at the organizational level can increase employee creativity and performance. This chapter provides compelling stories about how and why public organizations must innovate.

Government expenditure needs to be financed. The two ways to do so are via taxes or via deficits and debt. For the first 90 of the past 150 years, public expenditure broadly grew in line with revenue, except during wars and times of crises. This changed fundamentally in the 1960s and early 1970s as the ‘Keynesian revolution’ took hold.Over the past fifty years, revenue rose strongly, but public spending often increased even faster. Chronic deficits stoked a high and growing stock of public debt in much of the advanced world. Public debt in the largest countries is now similar to the level prevailing at the end of the Second World War. Future governments will also face significant liabilities from increasing public expenditure related to population ageing, as well as fiscal risks from the financial sector. These liabilities and risks imply higher expenditure which will need to be financed. At the same time, there are political and economic limits to both taxation and indebtedness.