pubic expenditure Flashcards
what is current govt expenditure?
- spending which recurs. this is on goods and services which are consumed and last a short period of time
- e.g drugs for health service
what is capital govt expenditure?
- spent on assets which can be used multiple times
- e.g govt expenditure on roads/ buildings
what are transfer payments?
- welfare payments from the govt
- aim to provide a minimum standard of living for those on low incomes
- no goods or services are exchanged for transfer payments
- help to reduce the level of inequality in society
- are a means to redistribute income from the rich to the poor
what are examples of transfer payments in the Uk?
o Job Seeker’s Allowance
o Income Support
o Child benefit
o The state pension
what are the reasons for changing size and composition of public expenditure in a global context?
- in the UK, the govt spends most of their budget on pensions and welfare benefits, followed by health and education
- income tax is the biggest source of tax revenue
- education spending in the UK have remained relatively constant
- this is because its protected so it doesnt fall
- however it doesnt inc by much either
- social security payments are payments from the govt to assist those who have low incomes
- defence spending in the UK is falling
how does the govt spend a proportion of GDP on productivity and growth?
- govts can spend money on supply-side policies to improve human capital and inc long run growth
- human capital is important for competitiveness
- education and training can mean higher value products can be made and productivity can be improved
- fiscal policy aims to stimulate economic growth and stabilise the economy
- govt could influence the size of the circular flow by changing govt budget
- spending and taxes can be targeted in areas which need stimulating
how does the govt spend a proportion of GDP on crowding out?
- govts might have to fund its spending using taxes/ running a budget deficit
- this leaves fewer funds in the private sector for firms to use since the govt is borrowing money
- crowds them out of the market
- when govt borrows a lot of money, interest rates may inc
- this discourages spending and investment
- this is the crowding out of investment
- crowding out may also refer to the govt provision of a good/service which would otherwise be provided by the private sector
why may levels of taxation change?
- tax rate may inc if the govt debt gets too high
- if confidence is lost in the govts ability to repay debt govt may have to raise interest rates to encourage investors to buy bonds so they can finance the debt
- could lead to higher tax rates and austerity measures
citizens in the UK have a lower tax burden than in a country such as Switzerland, where government spending is 60% of GDP
how does the govt spend a proportion of GDP to influence equality and living standards?
- progressive tax can be used to reduce inequality as the poorest in society pay the smallest proportion of their income tax
- redistributive policies and welfare payments could be used to help those on lowest incomes
- govt spending on housing and provision of public services such as education provide equal opportunities from all income backgrounds
- this ensures that even those on low incomes can afford a good standard of healthcare and education
- through this the govt ensures that all members of society can achieve a minimum standard of living
what are the 3 components that govt spending is split into
transfer payents
capital expenditure
current expenditure
what are the reasons for govt expenditure
provide merit goods
provide goods that wont be provided for by the private sector
redistribute income through transfer payments
provide essential services
overcome forms of market failure
why do governments levy taxes
assist govt in achieving its macroeconomic objectives
finance govt expenditure
repay govt debt
redistribute income and wealth
what are the principles of taxation
economical- should be cheap to collect in relation to the revenue it yields
equitable- should be fair and based on taxpayers ability to pay
efficient- should achieve objectives with minimum negative consequences
convenient for taxpayers to pay
certain - taxpayers should be certain of the amount of tax they need to pay
flexible - change if circumstances change
what are the disadvantages of direct taxes
easy to avoid/ evade
high earners can avoid tax by signing up for tax efficient schemes provided by their financial advisers
highly progressive income tax may disincentivise hard work, risk taking and entrepreneurial
how do direct taxes affect the economy
influence on investment -> if corporation tax too high then they have less money leftover for investment
incentive to work
infuence on tax avoidance/ evasion
influence on consumption
impact on the distribution of income
