4.5.1 - public expenditure Flashcards
(16 cards)
What are the reasons for public expenditure/government spending?
Used for macroeconomic management to control AD and achieve macro objectives: economic growth, low and stable inflation, balanced current account, low unemployment. They aim for equity and equality by providing services to individuals/groups who would otherwise not receive them. Also, government spending can correct market failure by providing public goods and fixing externalities.
What is capital expenditure?
Government spending on investment goods/capital projects eg. new roads, schools, hospitals, which will be consumed in over a year (long term)
What is current expenditure?
Relates to the government’s day-to-day expenditure on goods and services eg. wages of civil servants, drugs used by the NHS
What are transfer payments?
Those made by the state to individuals without there being any exchange of goods/services - there is no production in return for these payments. Typically used as a means of redistributing income eg. Employment and Support Allowance for ill/disabled people, pensions and child benefit
What are some reasons for the changing size and composition of public expenditure in a global context?
- changing incomes
- changing age distributions
- changing expectations
- the financial crisis
How does changing incomes change the size and composition of public expenditure?
The lower the average income of the country, the lower the percentage of GDP spent by the government is likely to be. This is due to lower tax revenues, due to avoidance, inefficiency and a smaller amount of wealth to tax. Citizens in higher income countries demand more services from the government, public goods are income elastic.
How does changing age distributions change the size and composition of public expenditure?
Ageing populations may require high public expenditure levels as they demand more healthcare services and pension payments. Also, countries with younger populations may demand more education, leading to increased public expenditure.
How does changing expectations change the size and composition of public expenditure?
New technology in services such as healthcare and education causes people to have higher expectations about government provided services, increasing public expenditure levels.
How did the financial crisis change the size and composition of public expenditure?
This led to increased proportion of public expenditure being spent in debt interest in many countries. Governments have had to increase welfare payments, taxpayer money may have been used to bail out banks. However, since 2010 the UK government followed a policy of austerity in an attempt to reduce the debt. They have been attempting to reduce expenditure where they can, therefore size of public expenditure may depend on government aims.
What are some impacts of high public expenditure levels as a proportion of GDP?
- productivity and growth
- living standards
- crowding out
- level of taxation
- equality
How does high public expenditure impact productivity and growth?
The government may experience economies of scale when it provides goods, improving productivity. They also provide infrastructure necessary for the economy to run efficiently. education increases human capital necessary for growth and the healthcare system reduces the number of days workers lose from serious illness. Spending on R+D can give businesses a long-term competitive edge. The spending may create a multiplier effect, which can be focused on areas of the country with high unemployment, stimulating growth. However, as the government is not motivated by profit, there may be little incentive to increase efficiency
How does high public expenditure impact living standards?
Can cause improvements in living standards. The government corrects market failure and provides public goods, improving social welfare. They can reduce absolute poverty by providing benefits and basic goods. However, it is argued that the government is inefficient at providing goods/services, which has a disincentive on workers = output is reduced and living standards fall. The government may suffer from the principal-agent problem as they make decisions on behalf of other people, who may have spent money differently = loss of welfare and fall in living standards. However, this may not be true as the political system means that society decides the government, so to some extent they choose where money is spent.
What is the impact of high public expenditure on crowding out?
The government may have to borrow, in order to spend above their tax revenues. The government will have to compete with the private sector for finance, causing higher interest rates, discouraging firms from investing and individuals from credit-fuelled consumption. The more resources used in government spending, the less resources available for the private sector. This means that government borrowing crowds out private sector borrowing/spending and there is no real increase in AD levels. Some argue that investment is more efficient when it comes from the private sector. Crowding out is most impactful when the economy is at full employment. Transfer payments have no impact on output and wouldn’t cause crowding out, as the government doesn’t take extra resources from the economy. When levels of unemployment are high, extra government spending may lead to crowding in where investment is encouraged through the multiplier effect.
What is the impact of high public expenditure levels on the level of taxation?
In most cases, when government spending is high, levels of tax must also be high for spending to be sustainable. High levels of tax can create a disincentive effect eg. people work less hours due to high income tax. However, in oil-rich countries, revenue from oil may be used to pay for most government spending.
What is the impact of high levels of public expenditure on equality?
Government spending should increase equality as it leads to redistribution of income and provides a minimum standard of living for the poorest groups in society. It ensures everyone has access to basic goods, such as education and healthcare, giving them a fair start in life.
How does high levels of public expenditure impact the size of the National Debt?
High levels of public expenditure may lead to successive years of budget deficits, increasing the size of the National Debt. This would result in increased interest payments on the National Debt by the government. May reduce public expenditure levels in the future on services such as education and healthcare.
