4.5.1 - Public expenditure Flashcards
What is capital expenditure
Refers to government spending on long-term investments and assets that are expected to provide benefits over multiple years.
Examples : Spending on infrastructure (roads and bridges).
What is current expenditure
Refers to daily expenditure on recurring items such as salaries maintenance and operational costs.
- This is to maintain the existing levels of public services.
What is transfer payments
Refers to payments made to individuals or groups without the expectation of goods and services in return.
- Examples include social welfare (e.g unemployment benefits, pensions), subsides to specific industries and grants to local governments.
Reasons for the changing size and composition of public expenditure in a global context
- Changing incomes
- Changing Age distribution
- 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 income elastic) - e.g. library services, cleaner coastal waters, better recycling facilities
What did aldoph Wagner find out ?
Warner’s law sate that as the levels of national income increases there will be an even greater increase in public expenditure.
Aldolph Wagner diagram
Evaluation for incomes affecting public expenditure
As people can afford cars so won’t need public transport. As well as paying for private school services instead of public school.
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 the Global Financial Crisis of 2008 affected the size and composition of public expenditure?
The Global Financial Crisis led to huge increases in government spending as governments had to increase welfare spending and bail out the banks.
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%.
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.
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.
Crowding out effect diagram
⬆️gov borrowing from banks (due to fiscal policy) = ⬆️interest rates or gov may borrow from other countries or the private sector through issuing bonds however they have to raise interest rates to make bonds attractive.
Private sector expenditure decreases
Drawbacks of public expenditure
- 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.
