Public expenditure Flashcards
3 types
Capital
Current
Transfer payments
Capital expenditure
Spending on long term assets with long term benefits e.g hospitals
Current expenditure
Spending on recurring costs e.g wages
Transfer payments
Money paid in exchange for nothing
3 Factors influencing P.E
Age distribution
Income
Political values
Age distribution on PE
Old-pension/healthcare
Young-education
Income on PE and evaluation
Wagner’s Law states that demand for public sector goods is income elastic. This means that an increase in incomes will lead to an even larger increase in public expenditure.
Eval:some public sector goods are inferior goods, such as education and healthcare, as rich people may opt for private. So public expenditure may not increase as demand for those fall
Political values
If the population trusts the government then they trust them to provide high quality public services. People are willing to pay high taxes in order to fund them.
What gets affected by P.E
Productivity and growth
Living standards and equality
Crowding out
Productivity and growth following an increase in P.E e.g healthcare
Increase G, AD. Increase health+productivity,increasing LRAS.
Eval:bureaucracy, money spent inefficiently
Living standards and equality following an increase in P.E e.g benefits and healthcare
Improved health>prod>incomes>living standards
Benefits>disposable incomes>equality
Public expenditure may not improve living standards and equality if it is spent on public services that don’t directly help the poor - like the military.
Resource crowding out
Resource crowding out is when public expenditure reduces resources available for the private sector. (resources move along the PPF)
Financial crowding out
Financial crowding out is when government borrowing pushes up the interest rate which decreases private sector investment.
