LS15 - Public Expenditure

Question 1

Types of Public Expenditure

Answer 1

Current Expenditure - govt day to day spending on goods and services - ex: wages of civil salaries, drugs used by NHS
Capital Expenditure - spending on infrastructure such as roads and hospitals
Transfer Payments - payments given by the state to individuals, used to redistribute income; govt ggets no goods or services in retun for this spending - ex: state pensions, benefits

Question 2

Changes in public expenditure

Answer 2

Changes in size and composition of public spending can be due to
* economic development - as economy develops, more spending on infrastrcture, education to boost capital
* rising incomes
* changes in population (dependency ratio) - as population ages (dep ratio rises), more spending on healthcare, pensions
* stage in econ cycle
* financial crisis - govt will have to spend more due to unemployment, low output and low consumption
* level of govt debt - will have to cut back spending if debt is too high

Question 3

Impacts of public spending

Answer 3

• productivity - govt spending on education, infrastructure, healthcare boosts quality of human capital and productive capacity
• living standards - spending on healthcare, infrastructure, welfare programs can boost living standards
• taxation - if govt debt is too high, they will increase taxes to cover spending
• inequality - spending towards education, unemployment benefits reduces income inequality, more equal distribution of income

Question 4

Crowding out

Answer 4

Increased govt spending results in lower private sector spending
* reallocation of resources towards public sector spending when economy is at full employment will reduce need for private sector spending (EV: govt spending will boost productive capacity so level of full employment rises)
* increases govt spending will push up interest rates, discouraging provate sector spending, as it is more expensive

Question 5

Crowding in

Answer 5

Increased govt spending results in higher private sector spending - govt spending can lead to improved productivty and output - higher income of firms and individuals, so rise in private spending (EV: depends on size of multiplier; govt spending used ineffectively might not lead to more growth)