LS15 - Public Expenditure Flashcards
Types of public expenditure
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
Changes in public expenditure
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
Impacts of public spending
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
Crowding out
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
Crowding in
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)
Factors affecting the size and composition of public expenditure
CHANGING INCOMES-
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 very income elastic) - e.g. library services, cleaner coastal waters, better recycling facilities
CHANGING AGE DISTRIBUTIONS-
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
CHANGING EXPECTATIONS-
As societal norms change, expectations change & this puts pressure on governments to change the substance & delivery mechanism of many of their services. This often results in increased spending e.g. NHS patients wanted online access to their medical records & the Government had to spend significant sums on creating the platform to do that
GLOBAL FINANCIAL CRISIS OF 2008-
UK Government borrowing increased significantly in order to facilitate the government spending required to avoid a long-lasting depression
This borrowing had to be repaid (with interest) & in the years following the crisis, the UK government cut their expenditure & raised taxes (austerity)
Significance of the level of public expenditure as a proportion of GDP
The size of gov spending as a proportion of GDP varies:
2020, it accounted for 51.44% of Sweden’s GDP, 40% of the UK’s GDP, & 25.37% of Thailand’s GDP
PUBLIC EXPENDITURE BENEFITS:
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
It increases economic growth
It drives innovation by providing long-term seed funding for firms & investing in applied research (some estimates say that global innovation has in the majority been created by public sector funding e.g. the mission to put a man on the moon or the need to keep a soldier safe in a particular scenario)
DRAWBACKS:
It can have a negative impact on productivity & long-term growth as without a profit incentive the urgency of labour diminishes & resources are used more inefficiently
It creates opportunity for corruption which can actually decrease the standard of living
If the government is running a budget deficit they will need to borrow funds from the private sector. This can create a crowding out
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 inequality of opportunity e.g. the North/South divide in the UK
Impact of public expenditure on productivity and growth
Free market economists- gov spending is wasteful and cause inefficiency. FM= profit motive whereas Gov has a social welfare. However, the government is able to enjoy EOS when it provides goods= improves productivity. Gov provide the, roads, necessary for the economy to run efficiently.
Education creates human capital necessary for growth whilst healthcare system reduces number of days workers lose from serious illness. Spending on research and development may not be done by the private sector and the government will undertake it to give businesses a long term competitive edge.
Keynesians- for gov intervention- multiplier effect. Higher growth and lower unemployment
Impact of public expenditure on living standards
Government spending can cause large improvements in living standards- GOV corrects market failure -provides public goods =improves social welfare.
They reduce absolute poverty - providing benefits and basic goods - education and healthcare. In developing countries, GOV do not have the resources = leads to malnutrition, poor water etc.
There is some debate about how much the government can contribute to improved living standards. It is argued gov will be inefficient at providing goods and services and will have a negative disincentive impact on workers, meaning that output overall is reduced and so living standards fall.
Government suffers from the principal agent problem since they make decisions on behalf of the people and individuals may have spent that money differently= there is a loss in welfare =fall in living standards. However, the political system means that society decides the government and so therefore decides to an extent where it would like money to be spent.
