Theme 4: Public Expenditure Flashcards
What are the 3 types of public expenditure?
- Capital expenditure
- Current expenditure
- Transfer payments
What is capital expenditure?
Government spending on long term assets that have long term rewards.
What is human capital?
The level of skill and knowledge in a population
What is current expenditure?
What the government spends on recurring costs i.e. things that you need to keep spending money on. This could include wages or raw materials.
What are transfer payments?
Direct transfers of payments in which the government gets no money in return.
What is the difference between public expenditure and government spending?
Public expenditure includes transfer payments whereas government spending does not.
What are the factors influencing public expenditure?
- Age distribution
- Incomes
- Political values
What is Wagner’s law?
Demand for public sector goods is income elastic. An increase in incomes will lead to an even bigger increase in public expenditure.
What is the issue with Wagners law?
Some public sector goods are inferior so as incomes increase demand decreases.
How do political values impact their views on public expenditure?
Countries with high trust for the government vote for politicians who promise high taxes and high government expenditure and vice versa.
What are the 3 areas affected by changes in public expenditure?
- Productivity and growth
- Living standards and equality
- Crowding out
What is resource crowding out? and show this on a graph
When all resources in the economy are being used efficiently
What is financial crowding out?
Government borrowing leads to higher interest rates which discourages firms from borrowing money.
