4.5.1 Public expenditure Flashcards
What are the main reasons for public expenditure?
- Efficiency and market failure
- Equity and equality
- Addressing externalities
The use of public expenditure to address market failure
- Free markets can be less efficient in the providing some goods and services than the state.
- Market failure means that free markets will produce public goods inefficiently and with not enough coverage. Therefore, the state has to intervene to correct market failure and organise the provision of services, such as defence, law, health and education.
- An example of this happening is education. The private sector will provide education – as seen with private schools such as Eton and Harrow. However, the private sector will not provide education to those who cannot afford it, it is the role of the state to do this.
The use of public expenditure to improve equality and equity
- Free markets tend to produce an unequal distribution of resources.
- In health care, for instance, those likely to face the largest bills are the elderly, typically in the lower income brackets of income distribution. Unless the state provides assistance, many elderly people would not be able to afford health care.
- Similarly, if education had to be paid for, children from poor families would suffer most. Governments therefore have to intervene in the market to correct the market failure.
The use of public expenditure to address externalities
- Governments often use public expenditure to manage individual markets in the economy, typically to reduce welfare loss.
- Free markets often overproduce goods with negative externalities (such as cigarettes) and underproduce goods with positive externalities (such as green energy or covid vaccines).
- Governments can therefore use public expenditure to boost consumption of goods with positive externalities (such as providing free covid vaccines) and reduce consumption of goods with negative externalities (such as imposing a tax on tobacco).
- Without government intervention, it is likely that covid vaccines would only be accessible to those who could afford them.
How much should governments spend?
There are arguments over how much governments should intervene in markets, and how much they should spend. The level which governments spend differs depending on opinions.
How does the level of public expenditure differ amongst developed countries.
In 2014:
- The USA had public expenditure make up 38% of GDP.
- The UK had public expenditure make up 44% of GDP.
- Finland had public expenditure made up 58% of GDP.
The average for OECD countries was 42%, and for EU member states it was 49%.
Why does the level of public expenditure differ between countries?
These differences reflect ideological differences about the role of the state and the role of the market.
The USA is far more market orientated. In the USA, access to medical care is left mainly to free markets whereas in Europe, most countries have government backed schemes that mean that everyone has access to free medical care.
Factors Affecting the Size & Composition of Public Expenditure
- Changing Incomes
- Changing Age Distribution
- Changing Expectations
- The Global Financial Crisis of 2008
How has changing Incomes affected the size and composition of public expenditure?
Countries with **low incomes **have low tax revenue leading to low government expenditure. As incomes in an economy increase, government tax revenues increase which allows them to increase their expenditure
As incomes increase, citizens demand a higher quantity & quality of government services (which are very income elastic) - e.g. library services, cleaner coastal waters, better recycling facilities
How has changing age distributions affected the size and composition of public expenditure?
Many developed countries have had lower birth rates for decades creating a situation where there is now a large & growing ageing population.
Life expectancy has also increased due to advances in medicine & nutrition.
This means that government spending on pension payments & healthcare will increase to support this elderly population.
How has changing expectations affected the size and composition of public expenditure?
As societal norms change, expectations change & this puts pressure on governments to change the substance & delivery mechanism of many of their services. This often results in increased spending
- e.g. NHS patients wanted online access to their medical records & the Government had to spend significant sums on creating the platform to do that.
How has the Global Financial Crisis of 2008 affected the size and composition of public expenditure?
UK Government borrowing increased significantly in order to facilitate the government spending required to avoid a long-lasting depression
This borrowing had to be repaid (with interest) & in the years following the crisis, the UK government cut their expenditure & raised taxes (austerity).
What is defined as in the public sector?
What is defined as in the public sector varies differs in each country, but it tends to include education, healthcare, utilities, R&D and infrastructure.
Benefits of public expenditure
- Improvements to the supply-side of the economy through expenditure on infrastructure, health, education etc.
- It improves the equality of opportunity e.g. education for all children
- It raises the standards of living for all e.g. development of parks, libraries etc
- It reduces poverty & decreases inequality in the distribution of income. This improves the Gini coefficient.
- It increases economic growth, as increases in government expenditure increases AD.
- It drives innovation by providing long-term seed funding for firms & investing in applied research (some estimates say that global innovation has in the majority been created by public sector funding e.g. space exploration has led to the development of new products, which are now widely used).
Drawbacks of public expenditure
- It can have a negative impact on productivity & long-term growth as without a profit incentive the urgency of labour diminishes & resources are used more inefficiently.
- It creates opportunity for corruption which can actually decrease the standard of living.
- If the government is running a budget deficit they will need to borrow funds. This leads to more tax revenue being spent on serving debt, leaving less available for public expenditure.
- Cost - it may require taxation levels to increase in order to pay for the expenditure
- If the spending is not spread evenly throughout different regions of the country, it can create geographical inequality of opportunity e.g. the North/South divide in the UK.
