8.4.1

Public Expenditure

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Public Expenditure

Public expenditure can be broken down into: capital expenditure, current expenditure and transfer payments

Illustrative background for Capital expenditureIllustrative background for Capital expenditure ?? "content

Capital expenditure

  • Capital expenditure is the spending on goods which create or help market other goods.
  • When the governments spend on capital it is usually infrastructure like transport networks which make it easier and cheaper for firms to produce goods and services.
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Current expenditure

  • Current expenditure is the spending on consumables and other non-capital goods, services and labour.
  • Governments’ current expenditure includes payment of public sector workers.
Illustrative background for Transfer paymentsIllustrative background for Transfer payments ?? "content

Transfer payments

  • Transfer payments are payments made by the government without receiving a good or service in exchange.
  • Government transfer payments include the spending on benefits and aid expenditure.

Public Expenditure in a Global Context

Government expenditure as a proportion of GDP provides an insight into the shape of the economy

Illustrative background for Allocation of goods and servicesIllustrative background for Allocation of goods and services ?? "content

Allocation of goods and services

  • The greater government expenditure is as a proportion of GDP, the more the government can be said to influence the allocation of goods and services and the closer that country is to being a command economy rather than free market.
  • Public sector expenditure is considered less effective than private sector spending in terms of productivity and growth because the government doesn’t have the same profit motive as a private firm.
  • However, targeted public spending may raise the level of productivity if it is focused on deficiencies in the free market e.g. education.
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Standard of Living

  • Government spending is usually driven by improving the standard of living of an entire country, thus it could be expected that a country with greater government spending is likely to be meeting the basic needs of its population. However, high levels of government spending could actually indicate that individuals aren’t able to demand much for themselves, indicating a lack of prosperity for individuals.
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Crowding out

  • Crowding out occurs when government spending replaces, rather than adds, to private sector spending and investment. This can happen either by forcing the price of goods and services up or by physically taking up all the resources, goods or services being produced so they aren’t available for the private sector.
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Equality and welfare

  • High levels of government spending have to be financed somehow or the government risks insolvency. In the short-run this can be covered by borrowing but in the long-run it has to be paid by higher taxes which could have an impact on welfare.
  • In most countries taxes are taken in greater proportion from the rich than the poor and spent on goods, services and transfer payments which which predominantly benefit the less well off (e.g. free schooling which children from poorer families may not otherwise have got). This leads to an improvement in equality.

Jump to other topics

1Introduction to Markets

2Market Failure

3The UK Macroeconomy

4The UK Economy - Policies

5Business Behaviour

6Market Structures

7A Global Perspective

8Finance & Inequality

9Examples of Global Policy

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