Public Expenditure Flashcards
Types of expenditure
Types of expenditure:
• Capital government expenditure is spending on investment goods such as new roads schools and hospitals which will be consumed in over a year.
The government also has to spend money on interest payments for national debt. The current government expenditure is general government final consumption plus transfe payments plus interest payments.
• Transfer payments are government payments for which there is no corresponding out where money is taken from one group and given to another, for example benefits and pensions.
Size of public expenditure
Size of public expenditure:
• In most mixed and free economies, the lower the average income of the country, the lower is likely to be the percentage of GDP spent by the goverment. This is because poorer countries tend to have a lower tax revenue
• Citizens in higher income countries demand more services from their governments
•The Global Financial Crisis led to huge increases in government spending as governments had to increase welfare payments and some governments used taxpayer money to bail out the banks
• Europe and Japan will see pressure on government spending due to ageing populations meaning larger pension bills and higher levels of care needed.
Impacts of public expenditure
Impacts of public expenditure:
• Growth - infrastructure increases growth, education increases employability and development, economies of scale provide goods and increase productivity
Living standards - government corrects market failure and provides public goods, reduce absolute poverty
Crowding out - government borrows from individuals and firms, but amount of money does not increase - causes higher interest rates which discourages investment
• Levels of taxation - taxation must be high for spending to be sustainable - OPEC countries are exception where revenue from oil pays for most of government spending
• Equality - spending should increase equality - increases living standard - redistribution of wealth
