4.5
PUBLIC EXPENDITURE
DISTINCTION BETWEEN CAPITAL EXPENDITURE,
CURRENT EXPENDITURE AND TRANSFER PAYMENTS
CAPITAL EXPENDITURE
govt spending on investment goods
e.g new roads, defence, flood defences
TRANSFER PAYMENTS
transfer payments involve welfare spending
there is no corresponding output involved
e.g pensions and benefits
CURRENT EXPENDITURE
money spent to deliver public services
e.g salaries, road maintenance, drugs for healthcare
e.g healthcare costs nearly £250 billion a year, and education spending £130
billion a year
REASONS FOR CHANGING SIZE AND COMPOSITION
OF PUBLIC EXPENDITURE IN A GLOBAL CONTEXT
CHANGING INCOMES
countries with low incomes have low tax revenue - therefore low govt
expenditure
as incomes increase, govt can increase its expenditure
4.5 1
, as incomes increase, people demand a higher quantity and quality of govt
services which are income elastic
e.g library services, better recycling, cleaner coastal waters
CHANGING AGE DISTRIBUTIONS
many developed countries have had lower birth rates for decades
this now creates a large and growing ageing population
life expectancy has also increased due to advances in medicine and nutrition
this has increased govt spending on pension payments and healthcare to
support this elderly population
CHANGING EXPECTATIONS
as societal norms and expectations change, this puts pressure on govts to
change the delivery of many of their services
this often results in increased spending
e.g NHS patients wanting access to medical records
this leads to govt needing to spend a lot to create a platform to do this
GLOBAL FINANCIAL CRISIS 2008
Uk govt borrowing increase significantly in order to facilitate the govt
spending required to avoid a long lasting depression
this borrowing had to be repaid with interest
therefore in the years following, UK govt had to cut their expenditure and
raise their taxes (austerity)
THE SIGNIFICANCE OF DIFFERING LEVELS OF PUBLIC
EXPENDITURE AS A PROPORTION OF GDP ON:
PRODUCTIVITY AND GROWTH
the govt provides the infrastructure necessary for the economy to run
efficiently
4.5 2
, improves supply side
e.g roads and transport can make firms more productive
education can increase the quality of human capital - more skilled work force
healthcare can increase the size of the labour supply - higher productive
potential
govt can spend on research and development that may have not been done by
the private sector
the govt can create a multiplier effect, and this can be focussed on parts of
the country with high unemployment
LIVING STANDARDS
govt provision of public goods can improve social welfare
e.g parks, clean water, waste management, libraries
govt spending can reduce absolute poverty
provides benefits and basic goods such as healthcare and education
in developing countries govt does not have resources to do this
leads to malnutrition, poor water quality etc
however govt may be inefficient at providing these goods and services
could create a negative disincentive for workers - e.g the benefits system
creates a disincentive to work
risk of corruption
CROWDING OUT
Crowding out is felt the most at full employment
crowding out limits private investment, therefore limits AD
4.5 3
PUBLIC EXPENDITURE
DISTINCTION BETWEEN CAPITAL EXPENDITURE,
CURRENT EXPENDITURE AND TRANSFER PAYMENTS
CAPITAL EXPENDITURE
govt spending on investment goods
e.g new roads, defence, flood defences
TRANSFER PAYMENTS
transfer payments involve welfare spending
there is no corresponding output involved
e.g pensions and benefits
CURRENT EXPENDITURE
money spent to deliver public services
e.g salaries, road maintenance, drugs for healthcare
e.g healthcare costs nearly £250 billion a year, and education spending £130
billion a year
REASONS FOR CHANGING SIZE AND COMPOSITION
OF PUBLIC EXPENDITURE IN A GLOBAL CONTEXT
CHANGING INCOMES
countries with low incomes have low tax revenue - therefore low govt
expenditure
as incomes increase, govt can increase its expenditure
4.5 1
, as incomes increase, people demand a higher quantity and quality of govt
services which are income elastic
e.g library services, better recycling, cleaner coastal waters
CHANGING AGE DISTRIBUTIONS
many developed countries have had lower birth rates for decades
this now creates a large and growing ageing population
life expectancy has also increased due to advances in medicine and nutrition
this has increased govt spending on pension payments and healthcare to
support this elderly population
CHANGING EXPECTATIONS
as societal norms and expectations change, this puts pressure on govts to
change the delivery of many of their services
this often results in increased spending
e.g NHS patients wanting access to medical records
this leads to govt needing to spend a lot to create a platform to do this
GLOBAL FINANCIAL CRISIS 2008
Uk govt borrowing increase significantly in order to facilitate the govt
spending required to avoid a long lasting depression
this borrowing had to be repaid with interest
therefore in the years following, UK govt had to cut their expenditure and
raise their taxes (austerity)
THE SIGNIFICANCE OF DIFFERING LEVELS OF PUBLIC
EXPENDITURE AS A PROPORTION OF GDP ON:
PRODUCTIVITY AND GROWTH
the govt provides the infrastructure necessary for the economy to run
efficiently
4.5 2
, improves supply side
e.g roads and transport can make firms more productive
education can increase the quality of human capital - more skilled work force
healthcare can increase the size of the labour supply - higher productive
potential
govt can spend on research and development that may have not been done by
the private sector
the govt can create a multiplier effect, and this can be focussed on parts of
the country with high unemployment
LIVING STANDARDS
govt provision of public goods can improve social welfare
e.g parks, clean water, waste management, libraries
govt spending can reduce absolute poverty
provides benefits and basic goods such as healthcare and education
in developing countries govt does not have resources to do this
leads to malnutrition, poor water quality etc
however govt may be inefficient at providing these goods and services
could create a negative disincentive for workers - e.g the benefits system
creates a disincentive to work
risk of corruption
CROWDING OUT
Crowding out is felt the most at full employment
crowding out limits private investment, therefore limits AD
4.5 3
