4.5 The role of the state in the macro-economy Flashcards
What are the roles of the state in the macroeconomy?
- Manage the level of macroeconomic activity (Mainly current expenditure to manage AD)
- Adjustment and redistribution of income (transfer payments in the form of the welfare state to control inequality)
- Provide goods and services that wouldn’t be created by the market (public goods)
- Specific action to alter economic behavior (supporting domestic production, controlling employment, influencing the trade balance and exchange rate)
What are the 3 types of central and local government spending?
- Current spending
- Capital spending
- Transfer payments
What is current spending?
Day to day expenditure on goods and services and debt interest
What is capital spending?
Expenditure on long term investment on goods and services like new hospitals, schools, roads etc.
What are transfer payments?
Payments made by the state from tax revenues to individuals in the form of benefits e.g. JSA and Universal credit.
What are transfer payments used for?
To create greater income equality, all developed economies use benefit systems to influence equality to some degree
What is universal credit?
A single online payment that replaces income-based JSA, income support, child tax credit, working tax credit and housing benefit, it is administered online and is adjusted to the amount of work a claimant does in any week
Positives of the universal credit system?
UC should in theory give people the incentive to be in work as they will always be better off, eliminating the poverty trap
Training and support is also provided
Negatives of the universal credit system?
System is punitive and often punishes people for not following the rules - hitting poor families harder
Delays in payments cause toxic debts
Many worse off and SR impact on QOL is negative.
What are the six main reasons for changes in the structure of government spending?
- Changes in the business cycle
- Political ideologies
- Welfare reforms
- Conflict/military/defence
- Financial crisis
- Ageing population
What is the business cycle?
Refers to the economy wide fluctuations in production or ecoinomic activity over a period of several monrths or years.
What is the business cycle like?
Fluctuations of occur around a long term growth trend and involves shifts of rapid economic growth (boom) and periods of relative stagnation or decline (recession)
What happens during periods of growth/recession?
Confidence is high, so spending is high (AD) but in the LR inflation starts to rise, leads to increases in IR and automatic stabilisation occurs
What happens during periods of recession?
Confidence is low, so spending is low, but in LR confidence improves as prices are lower and IR are lower
How does the business cycle impact government spending?
During times of recession, the UK government has almost always driven up government spending to drive up AD to stimulate the economy, but periods of Austerity and lower spending have been used.
How does changing economic ideologies affect government spending?
The type of government, their stated objectives as well as their emphasis they put onto the size of the state in the wider macroeconomy.
What are the typical expectations of CON vs LAB in government spending?
Labour = Bigger government with higher spending and more inflation
Conservatives = Smaller government with lower spending and low intervention
How does redistributing income using the welfare state affect government spending?
The introduction of the welfare state under Atlee post WW2, increased spending sustainably which has had a positive effect on the supply side, with labour mobility increasing hugely.
How does defence/military spending affect government spending?
Changes in defence spending is influenced by potential conflicts the UK is involved in e.g. NI, WW1, WW2, Falklands, Gulf war
How can financial crisis affect government spending?
- Bank bailouts can be used to prop up the financial sector in crises, Alistair Darlin spent £139.5bn to sustain the banking industry in summer of 2007
- Increased interest repayments on the increased national debt. The government has to borrow money to repay the national debt used to bail out the financial sector.
How does an ageing population affect government spending?
Over 15% of the UK is over 60, this is a gradual change which has been caused by improvements in healthcare and infrastructure which means government spending will rise to pay for hospitals, staff, transport and the accommodation of old people - on top of state pensions increasing.
What political side typically argues an increase in government spending positively correlates with an increase in productivity, growth and living standards?
The left
What political side typically argues an increase in government spending negatively correlates with an increase in productivity, growth and living standards?
The right
What are the arguments that an increase in govt spending increases productivity, growth and living standards?
- If the govt uses their income to redistribute income this could lead to an overall increase in the standards of living and increase in overall utility
- Govt spending provides public, merit and goods with positive externalities that markets are generally unable to do so.
- Keynes argues that in times of economic downturn the governments can borrow and spend money to create jobs and capital that have been underemployed or underutilised as it then creates a multiplier effect that creates higher growth.
What does Wagner’s law suggest about welfare spending and capitalism?
Suggests a welfare state will evolve from free market capitalism due to the population voting for ever increasing social services (govt spending will inevitably increase as the economy grows)
What are the arguments that an increase in government spending does not increase productivity, growth and living standards (negative correlation)?
- The displacement cost - Government spending displaces private-sector activity. Every dollar that the government spends means one less dollar in the productive sector of the economy.
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The negative multiplier cost - Government spending finances harmful intervention. Portions of the federal budget are used to finance activities that generate a distinctly negative effect on economic activity. For instance, many regulatory agencies have comparatively small budgets, but they impose large costs on the economy’s productive sector.
* The behavioural subsidy cost - Government spending encourages destructive choices. Many government programs subsidize economically undesirable decisions. - The behavioural penalty cost - Government spending discourages productive choices. Government programs often discourage economically desirable decisions.
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The market distortion cost. Government spending hinders resource allocation. Competitive markets determine prices in a process that ensures the most efficient allocation of resources. However, in both health care and education, government subsidies to reduce out-of-pocket expenses have created a “third- party payer” problem.
The inefficiency cost. Government spending is a less effective way to deliver services. Government directly provides many services and activities such as education, airports, and postal operations. However, there is considerable evidence that the private sector could provide these important services at higher quality and lower costs. - The stagnation cost. Government spending inhibits innovation. Because of competition and the desire to increase income and wealth, individuals and entities in the private sector constantly search for new options and opportunities. Government programs, however, are inherently inflexible.
