4.5.1 Public Expenditure

Question 1

Public expenditure

Answer 1

The government spends money for a number of reasons. It is used for macroeconomic management to control AD and achieve macroeconomic objectives: economic growth, low and stable inflation, balanced current account and low unemployment. Moreover, they aim for equity and equality by providing services to individuals or groups who would otherwise not receive them. Additionally, government spending can correct market failure by providing public goods and fixing externalities.

Question 2

Types of expenditure

Answer 2

1) Capital government expenditure
2) Transfer payments
3) Current government expenditure

Question 3

Capital government expenditure

Answer 3

Spending on investment goods such as new roads, schools and hospitals which will be consumed in over a year

Question 4

Transfer payments

Answer 4

Government payments for which there is no corresponding output, where money is taken from one group and given to another, for example benefits and pensions

Question 5

Current government expenditure

Answer 5

General government final consumption plus transfer payments plus interest payments

Question 6

General government spending

Answer 6

General government final consumption is spending on goods and services that will be consumed within the next year, such as public-sector salaries

Question 7

Major areas of expenditure

Answer 7

Defence (6%)
Protection (4%),
Education (12%)
Pensions (20%)
Welfare (15%)
Transport (2%)
Health care (18%)
- 7% of all government spending is on interest repayments of loans.

Question 8

Reasons for the changing size and composition of public expenditure in a global context

Answer 8

● In most mixed and free economies, the ​lower the average income of the country, the lower is likely to be the percentage of GDP spent by the government. This is because poorer countries tend to have a ​lower tax revenue​, due to avoidance, inefficiency at collecting and a smaller amount of wealth to tax.
- Moreover, citizens in higher income countries ​demand more services from their governments​; government provided goods are income elastic. For example, access to improving technologies means that more is demanded from the NHS compared to what would be demanded of state healthcare in poorer countries.
● However, amongst developed countries, there are ​significant differences in the size of government spending. For example the ​USA has much lower state spending, and this is due to ​attitudes​ in that country.
● The ​Global Financial Crisis led to huge increases in government spending as governments had to increase welfare payments and some governments used taxpayer money to bail out the banks. In the UK, ​the government bought stakes in
Lloyds and the Royal Bank of Scotland.
● However, ​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.
● In the next decades, ​Europe and Japan will see pressure on government spending due to ​aging populations meaning larger pension bills and higher levels of care needed.

Question 9

Public expenditure impacts