public expenditure 4.5.1 Flashcards
types of gov expenditure
capital gov expenditure general gov final consumption transfer payments current gov expenditure interest payments for national debt
capital gov expenditure
spending on investment goods like roads schools which will be consumed in over a year
general gov final consumption
spending on goods and services that will be consumed within the next year
transfer payments
money is taken from one group and given to another eg benefits
current gov expenditure
all of them added together
why are there differences in composition and size of public expenditure
the lower the average income, the less that is spent by gov
poorer countries have lower tax revenue due to tax avoidance, smaller amount of tax to collect from wealth etc
higher income countries have higher demand from gov with income elastic goods
difference in attitudes can change spending
taxpayer money used to bail out banks during financial crisis
what does gov expenditure impact
productivity+growth living standards crowding out level of taxation equality
how can gov expenditure impact productivity + growth
free market economists would argue gov spending is wasteful, causes inefficiency
provides infrastructure so economy runs efficiently
education-human capital
healthcare-reduces number of days workers lose from serious illness
gov creates multiplier effect from spending
how can gov expenditure impact living standards
corrects market failure, provides public goods to improve social welfare
reduces absolute poverty with benefits and basic goods like education
may be inefficient with provision of goods
negative disincentive impact on workers so output overall is reduced
principal agent problem ( making decisions on behalf of everyone, who may have spent the money differently) political system allows us to decide to some extent
how can gov expenditure impact crowding out
the gov borrows from businesses to spend money above their tax revenues but the amount of money in the economy available to borrow doesn’t increase so the gov competes with private sector for finance, causing high interest rates
limited resources so if the gov uses them there’s less available for private sector
free market economists-investment=efficient if done by private sector
crowding in
high levels of unemployment, there’s extra gov spending to encourage investment through the multiplier
how can gov expenditure impact level of taxation
level of tax must be high for spending to be sustainable which can have a disincentive effect
oil-rich countries however can be an exception-revenue from oil can pay for most of gov spending
how can gov expenditure equality
redistribution of income to provide minimum standard of living, gives access to basic goods like education for a fair start in life
