4.5.1: Public Expenditure Flashcards
Why does the government spend money?
-Achieves macroeconomic objectives.
-Corrects market failure through provision of public goods & fixing externalities.
What is Capital Expenditure?
Spending on long term investment projects (e.g. new roads, schools, hospitals).
What is Current Expenditure?
Spending on day-to-day expenditure on goods & services (e.g. salaries, NHS drugs).
What is Transfer Payments?
Payments with no corresponding output; where money is taken from one group and given to another (e.g. benefits, pensions, subsidies).
What are the reasons for the changing size & composition of public expenditure in a global context?
-After WW2, people saw social security as necessary, so there has been a general increase in spending.
-The 2008 Financial Crisis led to huge increases in government spending, as governments had to increase welfare spending and bail out the banks.
-Ageing populations in Europe and Japan will mean there is more pressure on government spending, due to higher pension bills and higher levels of care needed.
What are the factors that are affected by differing levels of public expenditure as a proportion of GDP?
-Productivity & Growth.
-Living Standards.
-Crowding Out.
-Level Of Taxation.
-Equality.
How is productivity & growth affected by differing levels of public expenditure as a proportion of GDP?
-Governments can spend on supply-side policies to improve human capital & boost long-term growth.
-Fiscal policy, like spending in areas that require stimulation, stimulates economic growth.
How is living standards affected by differing levels of public expenditure as a proportion of GDP?
-Providing public goods & reducing absolute poverty provides minimum living standards.
What is the crowding out effect?
An economic theory that argues that rising public sector spending drives down private sector spending.
How is crowding out affected by differing levels of public expenditure as a proportion of GDP?
-Governments might have to fund its spending using taxes or running a budget deficit.
-This leaves fewer funds in the private sector for firms to use, since the government is borrowing money, which crowds them out of the market.
How is level of taxation affected by differing levels of public expenditure as a proportion of GDP?
-Where government spending is high, levels of tax must be high in order for spending to be sustainable.
-Oil-rich countries can be an exception.
How is equality affected by differing levels of public expenditure as a proportion of GDP?
-Redistributive policies and welfare payments could be used to help those on the lowest incomes.
