Public Expenditure Flashcards
Reasons for Public Expenditure
Efficiency and Market Failure - Free Markets are not always efficient and mis-allocation of resources can lead to market failure.
Equity and equality - Free markets can produce an inequitable and unequal distribution of resources. In health care, for instance, those likely to face the largest bills are the elderly, typically in the lower income brackets of income distribution. Unless the state provides assistance, many elderly people would not be able to afford health care.
Macroeconomic management - Governments may want to use their spending to manage individual markets in the economy. Markets may over produce or under produce. For example, free markets are likely to over produce cigarettes and under produce green energy. Therefore, the government can increase spending on anti-smoking ads and increase subsidies to producers of green energy in order to reduce greenhouse gas emissions.
3 Types of Public Expenditure
Capital Government Expenditure - Spending by the government on investment goods, such as new roads, new hospitals or new street lighting.
Transfer Payments - Spending for which there is no corresponding real output; in government expenditure, transfer payments are welfare payments such as the state pension or child benefits.
Current Government Expenditure - Spending by the government on goods and services which will be consumed in the short term, such as teachers’ salaries or heating for government buildings; it also includes transfer payments and debt interest.
Reasons for changing size and composition of public expenditure.
Productivity and Growth - High % of GDP may indicate slow productivity and growth.
Living Standards - The proportion of public expenditure spent on transfer payments and health
Levels of Taxation - If public expenditure is a high proportion of GDP then it is likely that taxation will also be a high proportion.
Equality - Much research suggests that higher spending is associated with greater equality eg Sweden and Denmark.
