4.5.1 - Public expenditure

• • Capital expenditure refers to government spending on long-term investments and assets that are expected to provide benefits over multiple years.
• Capital expenditure

  • Examples include infrastructure projects (e.g., roads, bridges), public buildings, and investments in education or healthcare facilities.
  • Capital expenditure contributes to economic growth and productivity by enhancing a country's physical and human capital.
• • Current expenditure consists of day-to-day government spending on recurring items, such as salaries, maintenance, and operational costs.
• Current expenditure

  • This category includes expenses related to running government agencies, providing public services, and covering welfare programs like unemployment benefits.
  • Current expenditure maintains the existing level of public services but does not typically contribute directly to long-term economic growth.
• • Transfer payments are government payments made to individuals or groups without any expectation of goods or services in return.
• Transfer payments

  • Examples include social welfare payments (e.g., unemployment benefits, pensions), subsidies to specific industries, and grants to local governments.
  • Transfer payments are redistributive in nature, aimed at providing support to individuals or entities in need
• Government spending is a critical aspect of fiscal policy that plays a significant role in shaping an economy's performance and distribution of resources
• Reasons for the Changing Size and Composition of Public Expenditure in a Global Context:

  • In response to economic crises or changing economic conditions, governments may increase spending to stimulate growth or reduce spending to control deficits.
  • Changing demographics, such as an aging population, can lead to increased spending on healthcare and pensions.
  • Political ideologies can influence the composition of public expenditure, with some governments favoring social welfare programs and others emphasizing defense or infrastructure.
• Significance of Differing Levels of Public Expenditure as a Proportion of GDP on:

  Productivity and Growth:

  • Higher levels of public expenditure on investments like education, healthcare, and infrastructure can enhance human capital and physical capital, thereby contributing to productivity and long-term economic growth
• Significance of Differing Levels of Public Expenditure as a Proportion of GDP on:

  Living Standards:

  • Public expenditure on welfare programs, healthcare, and education can improve living standards by providing essential services and social safety nets.
• Significance of Differing Levels of Public Expenditure as a Proportion of GDP on:

  Crowding Out:

  • Excessive government spending can lead to crowding out, where increased government borrowing raises interest rates, potentially reducing private sector investment and economic growth.
• Significance of Differing Levels of Public Expenditure as a Proportion of GDP on:

  Level of taxation

  • The level of public expenditure is often linked to taxation policies. Higher Public expenditure may require higher taxes, which can impact disposable income and economic incentives
• Japan has an ageing population and spends 10% of its GDP on pensions. Whereas in Botswana, 1 in 3 people are under the age of 15 and so public expenditure goes towards education instead.
• The demand for government goods and services is income.Elastic is very responsive to the change in incomes
• An increase in public expenditure can improve productivity by spending on education. Human capital will increase and workers will become more productive. This will shift the LRAS to the right and cause economic growth.
• Public expenditure may not improve living standards and equality if it spends on public services that don't directly help the port like the military.
• Spending on benefits and health care should improve living standards. And equality will increase. The services are more likely to benefit the poor.
• Resource crowding out occurs when all resources in the economy are being used efficiently.
• Financial crowding out occurs when an increase in government borrowing increases the demand for money which then increases the interest rate.
• Resource crowding out will increase the price of the resources, which will mean that there is an opportunity cost to the private sector for example, an increase in government spending on infrastructure projects will increase the demand for construction workers which will then increase the their wage. This means that the private sector will have to pay more for construction workers.