Public Expenditure – AS/A LEVELS/IB/IAL
Public Expenditure – AS/A LEVELS/IB/IAL
Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes
Difference between Capital Expenditure, Current Expenditure and Transfer Payments
Capital Expenditure – this is money spent on assets that can be used several times. For example, it can be government expenditure on new infrastructure
Current Expenditure – this money spent on goods / services which only last for a short period of time
Transfer Payments – these are welfare payments taken from the government and provided to low income families to help them achieve a minimum standard of living. Examples of Transfer Payments are: Job Seekers Allowance, Child Benefits, and State Pension
The Composition of Public Expenditure: Factors affecting the size of Public Expenditure
- The Level of GDP
- The State of the Economy – public expenditure is likely to rise during a period of recession, due to automatic stabilisers
- The demand for public services – demand for public services such as health and education is income inelastic which means consumers will continue to demand them regardless of a change in their income
- Inflation – the public expenditure will rise during periods of high inflation due to increased levels of government borrowing
- Size and age distribution of the population
Impacts of Public Expenditure
Living Standards
- Public Goods – The Government can increase their spending on public goods which will correct market failure as well as lead to improvements in living standards and social welfare
- Reduce Absolute Poverty – services such as healthcare and education provide benefits, especially to those in developing countries where they may experience a lack of basic resources
- Loss of Welfare – it can be argued that the government suffers from the principal agent problem as they make decisions on behalf of the economy; individuals may have chosen to spend that money differently
Productivity and Growth
- Economies of Scale – the Government can benefit from Economies of Scale when it provides goods, which leads to productivity
- Multiplier Effect – Government Spending can create the Multiple Effect which will result in Economic Growth
- Infrastructure – part of Government Spending includes infrastructure such as roads, transport systems and schools, which are necessary for the economy to run efficiently
- Research and Development – the Government can allocate more money towards Research and Development, which can help businesses achieve a long-term edge in the market
- Human Capital – education creates human capital which is necessary for growth
Taxation
- Higher Tax – Consumers are likely to be faced with higher levels of tax when Government Spending increases, in order to help finance them finance this
Crowding Out
- Higher Interest Rates – the Government have to borrow from individuals and businesses to to generate additional spending money above the amount collected in tax. Because the amount of money available for borrowing remains the same, the Government will have to compete with the private sector and this will cause interest rates to rise.
- Less Investment – Higher interest rates may discourage firms from investing and individuals from buying on credit
- Limited amount of resources – the Private Sector are likely to be faced with available less resources as the Government use most of them to finance their spending. This results in a ‘crowding out’ of Private Sector borrowing / spending and may lead to no increase in Aggregate Demand / Economic Growth
- Poor investment by the Government – free market economists argue that investment is more effectively carried out by the Private Sector as the Government targets investment ineffectively
Equality
- Increases equality – government spending leads to a redistribution of income which helps to improve the minimum standard of living, ensures everyone has access to basic goods and therefore results in an increase of equality
Quick Fire Quiz – Knowledge Check
1. Explain the difference between Capital Expenditure, Current Expenditure and Transfer Payments (6 marks)
2. Identify and explain four factors affecting the size of Public Expenditure (8 marks)
3. Identify and explain five factors impacting Public Expenditure (10 marks)
Next Revision Topics
A Level Economics Past Papers
