4.5.1 Public expenditure Flashcards
What are the 4 core types of government expenditure?
Capital Expenditure - Spending on investment like new roads.
Transfer Payments - Where money is taken from one group and given to another without any corresponding output - like benefits or pensions.
Current Expenditure - Money spent on interest payments or national debt.
General consumption - like money spent on public sector salaries.
What are the general areas of expenditure in the UK
20% on healthcare
10% on education
10% on interest repayments
Relationship between average income in country and % of GDP spent by Government?
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.
EVAL POINT -> only FM and Mixed economies, command is different.
Other factors that affect level of government spending in a country?
Attitudes within country -> AMERICA.
Events like the financial crisis - led to increased spending to bail out banks and welfare payments.
Population structure (Japan aging pop -> more strain on healthcare - 30% over 65+)
What do free market economists think of government spending?
They argue it is wasteful and causes inefficiency.
They believe the private sector could do things more efficiently without government interference.
What are the government spending benefits?
- Provide infrastructure.
- Improves human capital
- Multipler effect
- Improved living standards - reduce absoloute poverty.
What is the Principal Agent problem?
The principal-agent problem is a conflict in priorities between the owner of an asset and the person to whom control of the asset has been delegated.
Within the government - few people spend money on behalf of the wider population that might have spent the money differently.
What is crowding out?
In order to spend money above tax revenue - the government has to borrow from businesses and individuals. However the amount of money in the economy available to borrow does not increase.
The government will therefore be competing with the prviate sector for finance and will cause higher interest rates.
This will discourage firms / individuals from borrowing.
What are the exceptions to high govt spending = high tax countries?
Oil rich countries where revenue from oil can pay for most of spending and so tax = low.
Relationship between spending and equality.
Spending should increase equality as it leads to redistribution.
