4.5.1 Public Expenditure

Question 1

What are the types of govt. spending?

Answer 1

• capital spending
• current spending
• transfer payments

Question 2

What is capital spending?

Answer 2

• spending on capital goods
• e.g. buildings, schools, hospitals, roads, prisons

Question 3

What is current spending?

Answer 3

• daily payments required to run the govt. + public sector
• e.g. teachers/police/judges pay, heating, lighting etc

Question 4

What are transfer payments?

Answer 4

• payments for which there is no reciprocal economic activity
• this type of govt. spending does not contribute to GDP
• e.g. benefits

Question 5

What is the fiscal rule?

Answer 5

• govt. should only borrow, over an economic cycle, to finance capital expenditure as this will benefit future generations
• this is known as the golden rule
• if a govt. borrows to finance current expenditure it is putting the burden on the future gen to benefit the current

Question 6

Factors that change the size of+ composition of public expenditure

Answer 6

• changing age distributions
• changing incomes
• changing expectations
• the financial crisis

Question 7

Impact of changing age distribution on public expenditure

Answer 7

• increased LE due to healthcare advancements = ageing population
• increased demands on healthcare, pensions to support elderly

Question 8

Impact of changing incomes on public expenditure

Answer 8

• low incomes = low tax revenue = low govt. expenditure
• as income rises citizens demand higher quality + quantity of govt. services (which are very income elasticity)

Question 9

Impact of changing expectations on public expenditure?

Answer 9

• new technology in services such as health + education causes increased expectations = increased spending

Question 10

Impact of financial crisis on public expenditure?

Answer 10

• govt. support of banks led to increased borrowing
• this has led to increased proportion of public expenditure being spent on debt interest in many countries

Question 11

impact of covid 19 on public expenditure?

Answer 11

• increased spending on healthcare - PPE, increased cases
• increased spending on job retention scheme e.g. furlough scheme in UK
• increased spending on supporting businesses e.g. eat out to help out, business subsidies

Question 12

Significance of level of public expenditure as a proportion of GDP on:

Answer 12

• productivity + growth
• living standards
• crowding out
• level of taxation
• equality

Question 13

Impact of public expenditure on productivity + growth

Answer 13

• productivity will increase if the spending is on the supply side of the economy (shifting LRAS) - education, healthcare + infrastructure
• education = training + improved skills
• health = reduced absenteeism
• infrastructure = reduced journey times for goods/workers, improved geographical mobility

Question 14

Reasons for low productivity + growth from increased public expenditure

Answer 14

• the private sector is more efficient due to profit motive + increased competition than public sector
• therefore an increase in govt. spending as percentage of GDP may mean productivity falls
• this is because public corporations are not motivated by profit but aim to provide a service in the public interest

Question 15

Reasons for low productivity growth?

Answer 15

• decrease in product market competition
• loss of benefits of innovation spillovers from multinationals + more productive foreign-owned firms which will move operations from the UK
• low levels of investment in machinery/technology
• low levels of investment in education

Question 16

Methods to improve productivity growth as a % of GDP?

Answer 16

• improve competition in product markets
• encourage FDI - harder to attract now out of EU due to longer checks at borders + disruptions to supply chain
• investment in technology
• education + training
• develop managers use resources efficiently

Question 17

How can increased govt. spending increase GDP per head (living standards)?

Answer 17

• increased G = increase in AD = increase in real GDP via multiplier
• increase in LRAS if spending increases on education, health, infrastructure (especially if this is capital expenditure)
• increases in LE, reduced crime will benefit well-being + living standards

Question 18

Why might increases in GDP per head not lead to increase in living standards?

Question 19

What is crowding out?

Answer 19

• govt. creating a budget deficit due to spending being greater than taxation
• govt. issue bonds as a means for borrowing + to attract buyers of bonds interests rate are increased
• this will lead to the crowding out of private sector investment
• investment falls = AD will not be as large

Question 20

How will public expenditure impact taxation?

Answer 20

• increased public expenditure will need financing either by borrowing or tax
• it is likely that in the longer run that taxation will rise
• OR public expenditure will be cut in the long run + there will be an opportunity cost

Question 21

Impact of an increase in public expenditure as a % of GDP on equality?

Answer 21

• increased equality if public spending is on benefits - e.g. JSA, housing benefits, child benefits
• spending on pensions, council housing, state education
• however the effect on equality will depend on what the government is spend money on
• if such spending is cut = inequality