4.5.1 Types of Public Expenditure

Question 1

What is the proportion of public expenditure to GDP used for?

Answer 1

• Used as a measure to compare levels of public spending both over time and between different countries

Question 2

Current expenditure?

Answer 2

• Gov’s day-to-day expenditure on goods and services

e.g. wages of civil servants, drugs used by NHS

Question 3

Capital expenditure?

Answer 3

• Gov expenditure on infrastructure

e.g roads and hospitals

Question 4

Transfer payments?

Answer 4

• Payments given by the state to individuals

e.g. state pensions, JSA

Question 5

Reasons for changes to public expenditure?

Answer 5

• Economic development/rising incomes
• Changes in population structure
• Stage in business cycle
• Financial crisis
• Levels of gov. debt

Question 6

Crowding out definition?

Answer 6

• When increased government spending results in lower private sector spending

Question 7

Causes of crowding out?

Answer 7

• At full employment, reallocation of resources towards public sector = reduced private sector spending
• If increased gov spending is financed by borrowing = higher interest rates = reduced private sector borrowing for investment and consumption

However, even if at full employment, higher gov spending = increased economic growth = increased productive capacity of economy

Question 8

Crowding in definition?

Answer 8

• When increased gov spending results in higher private sector spending

Depends on size of multiplier and government spending may be used ineffectively