4.5.1 Public Expenditure Flashcards
(9 cards)
4.5.1a
Capital Expenditure
Spending on long-term investment projects to improve a nation’s productive capacity
4.5.1a
Current Expenditure
Day-to-day spending on running public services
4.5.1a
Transfer Payments
Welfare payments made to individuals
4.5.1b
Reasons for changing public expenditure
- demographic
- globalisation e.g more capital expenditure
- Pandemic e.g emergency spending
4.5.1c
Significance of Public Expenditure on : Productivity and Growth
• ↑ public spending on education + infrastructure = ↑ human & physical capital → ↑ labour productivity & business efficiency → ↑ LRAS + international competitiveness → ↑ long-term economic growth.
• e.g. Government investment in roads and broadband → ↓ transport/communication costs → firms operate more efficiently → ↑ output per input = ↑ productivity.
• HOWEVER… if ↑ public spending = ↑ tax rates or debt → private sector confidence ↓ → crowding out (see below) → ↓ investment → potential ↓ in growth
4.5.1c
Significance of Public Expenditure on : Living standards
• ↑ spending on healthcare, education & housing = ↑ access to basic needs + ↓ absolute poverty → ↑ life expectancy, literacy rates, social mobility → ↑ living standards.
• e.g. NHS in the UK = free universal healthcare → workers stay healthy → ↑ working days → ↑ incomes = ↑ standard of living.
• BUT… excessive state spending could be inefficient (gov lacks profit motive) → misallocation of resources → ↑ waste → ↓ effectiveness of spending on living standards.
4.5.1c
Significance of Public Expenditure on : Crowding Out
• ↑ gov spending = ↑ bond issuance → ↑ demand for loanable funds → ↑ interest rates → ↓ private sector borrowing → ↓ investment by firms = ↓ I in AD = ↓ growth.
• Also: If gov provides goods/services that private firms could provide → public sector ‘crowds out’ more efficient private provision → ↓ allocative & productive efficiency.
• HOWEVER… if spending = on capital goods (roads, ports) → ↑ productive capacity → crowding in occurs → ↑ private sector investment due to better infrastructure → multiplier effect → ↑ AD + ↑ LRAS.
4.5.1c
Significance of Public Expenditure on : Level of Taxation
• ↑ gov spending share of GDP = usually requires ↑ taxes → may ↑ disincentives to work (income tax) or invest (corporation tax) → ↓ productivity or ↑ tax avoidance.
• But: If tax system is well-structured (e.g. progressive) + gov uses Laffer Curve to stay within optimal tax range → can maintain incentives while raising enough revenue.
• Examples like Sweden show that high taxes + high public spending can coexist with good growth and equality if managed well.
4.5.1c
Significance of Public Expenditure on : Equality
• ↑ transfer payments + welfare → redistribute income → ↓ income inequality → ↑ social cohesion + stability → ↑ living standards for the poorest.
• State provision of education + health = everyone accesses essential services → ↓ relative poverty → ↑ equal opportunities.
• HOWEVER… excessive welfare may create welfare dependency → ↓ incentives to work → potential ↑ in structural unemployment if not well-designed (e.g. benefits trap).
