4.5.1: Public Expenditure

Question 1

What are the reasons for public expenditure?

Answer 1

• To tackle market failure; it encourages consumption of merit goods or discourage goods and services that create negative externalities
• To redistribute income; achieves more income equality
• To supply public and merit goods; provision of schools, healthcare and infrastructure projects would be left underprovided if left to the free market
• To manage macroeconomic objectives

Question 2

What are the types of expenditure?

Answer 2

• Capital government expenditure; spending on investment goods such as new roads, schools and hospitals
• Transfer payments; payment for where there is no corresponding output, eg benefits and pensions
• Interest payments for national debt

Question 3

What is the current government expenditure?

Answer 3

• General government final consumption + transfer payments + interest payments

Question 4

How does income affect GDP in mixed and free economies?

Answer 4

• The lower the average income of the country, the lower is likely to be the percentage of GDP spent by the government.
• This is as poorer countries tend to have lower tax revenue, due to avoidance, inefficiency at collecting and a smaller amount of wealth to tax.

Question 5

What are the impacts of government spending on productivity and growth?

Answer 5

• Free market economies argue that government spending is wasteful and cause inefficiency
• The government can provide infrastructure to help the economy to run efficiently
• Education creates the human capital for growth and spending on research and development will help long term competitive edge,

Question 6

What are the impacts of government spending on living standards?

Answer 6

• Gov spending can improve living standards; correct market failure and provide public goods, improving social welfare
• Reducing absolute poverty
• EV principal agent problem

Question 7

What is the impact of gov spending on crowding out?

Answer 7

• The government has to borrow from individuals and business; the government will be competing with the private sector for finance and will cause higher interest rates
• ## Decreases consumption

Question 8

What is the impact of gov spending on the level of taxation?

Answer 8

• Where gov spending is high, levels of tax must be high for spending to be sustainable. High levels of tax may have a disincentive effect

Question 9

Impact on equality

Answer 9

• Spending increases eqaulity as it leads to redistribution and helps to provide a minimum standard of living for the poorest in society