4.5.1 Pubic Expenditure Flashcards
What is current spending
Gives some examples
on goods and services for current use to directly satisfy the collective needs of the members of the community
Salaries of NHS employees, Drugs used in health care, Road maintenance budgets, Army logistic supplies
What is Capital Expenditure
Give some examples
government spending on goods and services intended to create future-benefits
Construction of new motorways + bridges, new equipment in the NHS, flood defence schemes, extra defence equipment
What are transfer payments
spending that does not involve transactions of goods and services, but instead represents transfers of money, such as social security payments, pensions and unemployment benefits
What are the major areas of public spending in the UK
defence (6%), protection (4%), education (12%), pensions (20%), welfare (15%), transport (2%) and health care (18%)
7% of all government spending is on interest repayments of loans
How does the average income of a country link to government spending
Why is this
Where do the problems arise with this
ower the average income of the country, the lower is likely to be the percentage of GDP spent by the government
poorer countries tend to have a lower tax revenue (from avoidance, worse financial systems etc)
However, there is usually more demand for these public services, as they are income elastic
Which recent event lead to large increases in Government spending
Covid - furlough schemes, eat-out to help-out
2009 financial crash - governments had to increase welfare payments and some governments used taxpayer money to bail out the banks
What is Austerity
When has it been used by the UK Government
since 2010 the UK government has been following a policy of austerity in an attempt to reduce the debt
They have been consistently attempting to reduce expenditure where they can
Therefore, the size of spending depends on government aims.
How will an ageing population affect Government spending
Europe and Japan will see pressure on government spending due to ageing populations
meaning larger pension bills and higher levels of care needed
How will Government spending affect productivity and growth
- government is able to enjoy economies of scale when it provides goods, and this improves productivity
- provide the infrastructure, such as roads, necessary for the economy to run efficiently
- education creates the human capital necessary for growth
- healthcare system reduces the number of days workers lose from serious illness
- Spending on research and development may not be done by the private sector and the government will undertake it to give businesses a long term competitive edge
- Create a multiplier effect
How does Government spending affect living standards
- government corrects market failure and provides public goods, which improves social welfare
- reduce absolute poverty by providing benefits and basic goods, such as education and healthcare
What are the arguments against Government spending improving living standards
- government will be inefficient at providing goods and services and will have a negative disincentive impact on workers, meaning that output overall is reduced
- government suffers from the principal-agent problem, resulting in a loss in welfare
- political system means that society decides the government and so decides to an extent where it would like money to be spent
How does the Government Spending cause crowding out
- to spend money above their tax revenues, the government has to borrow from individuals and businesses, The government will therefore be competing with the private sector for finance and will cause higher interest rates. This will discourage firms from investing and individuals from buying on credit
- limited number of resources in the economy means that for every resource used in government spending, there are less resources available for the private sector
- may lead to no real increase in AD
- crowding-out effect is felt most at full employment
How can Government spending not lead to Crowding out
- Transfer payments have no impact on output, as resources are simply taken from one group and given to another
- Moreover, when levels of unemployment are high then extra government spending could lead to crowding in where it encourages investment through the multiplier
How does the level of Government spending affect taxation
- where government spending is high, levels of tax must be high in order for spending to be sustainable. High levels of tax may have a disincentive effect
- Oil-rich countries tend to be an exception, where revenue from oil can pay for most of government spending
How can levels of Government spending effect equality
- Spending should increase equality as it leads to redistribution and helps to provide a minimum standard of living
- everyone has access to basic goods, such as education and healthcare
