Government expenditure comprises a significant part of GDP in most developed countries with a range of 30% to 50%. A small increase in the efficiency of public fund use leads to significant cost reduction and/or greater wellbeing for society. Hence the significance of using public funds efficiently. Furthermore, attention must be directed at the functional composition of public expenditure as different areas require different measures to increase efficiency and have differing potentials for cost reduction. In most developed countries health and social protection comprise together more than half of total public expenditure. Taking into account the methodological issues of measuring public expenditure, twenty-six European countries were analyzed with a focus on Croatia. The results and a comparison with similar studies point to a possibility of a great increase in the efficiency of public expenditure in Croatia in nearly all observed areas. Firstly, significant effort must be directed towards generating stable long-term growth with the purpose of improving the quality of Musgravian indicators. Secondly, an increase in output is necessary in public administration in accordance with improvements proposed in FIC's White Book. Thirdly, health and education need significant cost reduction along with an effort to increase education output. Finally, we draw attention to the efficiency of social protection expenditure and the efficiency of the labour market as it comprises such a vast part of total expenditure thus providing room for great cost reduction and/or an increase in wellbeing.