4.5.1 Public Expenditure

• Types of Public Expenditure


  -Capital expenditure

  -Current expenditure

  -Transfer payments
• Capital Expenditure


  Spending that yields long-term benefits e.g. solar panels, education, healthcare, defence etc.
• Current Expenditure

  Spending on recurring costs to allow public services to operate e.g. paying teachers' salaries and purchasing medication for hospitals
• Transfer Payments


  Spending where there is no return for the government e.g. universal credit, state pensions and subsidies because the government does not benefit from this but the recipients do, it is considered consumption NOT government spending.
• Factors Influencing Public Expenditure


  -Age distribution

  -Political ideologies

  -Incomes
• Age Distribution


  27% of Japan's population is over 65 thus the government must prioritise pensions and healthcare. Japan spends 10% of its GDP on pensions whilst in Botswana 1 in 3 people are under 15 so it prioritises education spending at 7.8% of its GDP
• Incomes


  Wagner's law states that as incomes increase demand for public goods increases as they are income elastic thus public expenditure must rise, however, this depends on whether the government provides normal or inferior goods.
• Political Ideologies


  Denmark's public expenditure is 58% of its GDP, and it can charge high taxes since its citizens trust the government. Whereas when there is low trust citizens vote for parties offering lower taxes.
• Impacts of Changes in Public Expenditure

  -Productivity and growth

  -Living standards and equality

  -Crowding out
• Productivity and Growth


  Increased current expenditure may improve the quality of services like healthcare which increases the productivity so AD and LRAS shift right. However, this requires funding to be spent efficiently
• Living Standards and Equality

  Spending on healthcare and benefits closes the gap between the lowest and highest earners in an economy and healthier people can work more and earn more which further reduces income inequality. However, public expenditure may be directed to different things like defence which do not directly benefit the poor.
• Resource Crowding Out


  When all resources in the economy are being used efficiently an increase in public expenditure increases costs for private investors as there are fewer resources, like the factors of production, available to them
• Financial Crowding Out


  Increased government borrowing causes high interest rates as the demand for money is high and banks aim to profit more, but this increases the cost of borrowing which discourages private investment