4.5.1 Public Expenditure Flashcards
What are the types of expenditure?
- capital government expenditure
- general government final consumption
- transfer payments
- current government expenditure
What is capital government expenditure?
spending on investment goods such as new roads, schools and hospitals which will be consumed in over a year
What is general government final consumption?
spending on goods and services that will be consumed within the next year (such as public-sector salaries)
what are transfer payments?
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)
what is current government expenditure?
general government final consumption plus transfer payments plus interest
Outline the major areas of expenditure
defence (6%)
protection (4%)
education (12%)
pensions (20%)
welfare (15%)
transport (2%)
health care (18%)
why is it that the lower the average income of the country, the lower the percentage of GDP spent by the government is likely to be?
poorer countries tend to have a lower tax revenue, due to avoidance, inefficiency at collecting and a smaller amount of wealth to tax.
However, amongst developed countries, there are significant differences in the size of government spending
- e.g. USA has much lower state spending and this is due to attitudes in that country
Outline and explain an example of when government spending increased
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
- in the next decades, Europe and Japan will see pressure on government spending due to ageing populations meaning larger pension bills and higher levels of care needed
How does government spending impact productivity and growth?
- free market economies argue gov spending is wasteful and causes inefficiency (however the gov is able to enjoy economies of scale when it provides goods, and this improves productivity)
- they also provide infrastructure necessary for the economy to run efficiently
- education creates the human capital necessary for growth whilst the healthcare system reduces the number of days workers lose from serious illness
- gov might spend on R&D to give businesses a long term competitive edge
- through spending the government can create a multiplier effect and this can be focused on areas of the country with high unemployment, creating growth
How does government spending impact living standards?
- large improvements in living standards
- gov corrects market failure and provides public goods, which improves social welfare
- they reduce absolute poverty by providing benefits and basic goods (education and healthcare)
- argument that gov will be inefficient at providing goods and services and will have a negative disincentive on workers, meaning that output overall is reduced and so living standards fall
- can be argued that gov suffers from principal agent problem since they make decisions on behalf of the people and individuals may have spent that money differently (as a result there is a loss in welfare and so a fall in living standards)
- however the political system means that society decided the government and therefore somewhat decides where it would like money to be spent
How does government spending impact crowding out?
- in order to spend money above their tax revenues, the gov has to borrow from individuals and businesses
- the government will be competing with the private sector for finance and will cause higher interest rates
- this will discourage firms from investing and individuals from buying on credit
- the limited number of resources in the economy means that for every resource used in government spending, there are less resources a available for the private sector
- the result is that government borrowing crowds out private sector borrowing and spending and may lead to no real increase in AD
- feee market economists argue that investment would be more efficient if done by the private sector and that the government targets investment poorly and is wasteful
- the crowding out effect is felt most at full employment, but it is not always the case
- transfer payments have no impact on output and so would jot cause crowding put as resources are simply taken from one group and given to another: the government isn’t taking resources from the economy
- when levels of unemployment are high then extra government spending could lead to crowding in where it encourages investment through the multiplier
How does government spending impact level of taxation?
- where government spending is high, levels of tax must be high in order for spending to be sustainable
- high levels of tax may have a disincentive effect
- oil-rich countries tend to be an exception, where revenue from oil can pay for most of government spending
How does government spending impact equality?
- spending should increase equality as it leads to redistribution and helps to provide a minimum standard of living for the poorest in society
- it ensures everyone has access to basic goods, such as education and healthcare, which will help to give them a fair start in life
