public expenditure

• Public expenditure


  Expenditure by central government, local authorities and public sectors organisations

  
• Purpose of public expenditure

  • To supply goods and services that the private sector would fail to do, such as public goods, including defence, roads and bridges; merit goods, such as hospitals and schools; and welfare payments and benefits, including unemployment and disability benefit
  • To achieve supply-side improvements in the macro-economy, such as spending on education and training to improve labour productivity
  • To reduce the negative effects of externalities, such as pollution controls
  • To subsidise industries which may need financial support, and which is not available from the private sector
  • To help redistribute income and achieve more equity
  • To inject extra spending into the macro-economy, to help achieve increases in aggregate demand and economic activity
• Types of public expenditure

  • Capital expenditure
  • Current expenditure
  • Transfer payments

  
• Capital expenditure


  Long-term investment expenditure on capital projects such as Crossrail or new hospitals by the government
• Current expenditure


  Government's day-to-day expenditure on goods and services, such as wages and salaries of civil servants, and drugs used by the NHS
• Transfer payments


  Payments made by the state to individuals without there being any exchange of goods or services, such as social security payments, pensions and unemployment benefit
• Examples of public expenditure

  • Construction of new motorways and bridges
  • Teachers' pension contributions
  • Army logistics supplies e.g. bullets
  • State pensions
  • Extra defence equipment
  • New equipment in the NHS
  • Drugs used in health care
  • Flood defence schemes
  • Road maintenance budget
  • Salaries of NHS employees
• Factors affecting the size of public expenditure

  • Demand for public services and changing expectations
  • Age of population
  • Size of population
  • Changes in tax base (tax avoidance, tax evasion, tax exiles)
  • State of the economy (automatic stabilisers)
  • Discretionary fiscal policy
  • Interest rates
  • External shocks (e.g. natural disasters, disease outbreak, global economic crisis)
  • GDP per capita or real incomes
  • Rate of inflation
  • Political priorities
  • Value of GDP (linked to % of GDP measure)

  
• Ageing population


  Average life expectancy in the UK is now 79.9 years for males and 83.6 years for females, up from 56 years for males and 59 years for females in 1920
• Ageing population


  Increases the size of public expenditure
• Areas of public expenditure that may need to increase due to an ageing population include pensions and healthcare
• An ageing population requires increased spending in these areas to meet the needs of the older population
• An economy in a downturn is an example of a recession
• Recessions are typically caused by a fall in aggregate demand
• Automatic stabilisers


  Where the Government does not need to take any action and changes to the budget outcome are done automatically without intervention, such as welfare and income taxation receipts being cyclical in nature
• During a recession


  Government spending rises due to automatic stabilisers
• During a recession


  The fiscal balance tends to move towards a deficit
• A rise in the fiscal deficit

  Increases public sector borrowing and the cost of debt servicing
• An increase in the cost of debt servicing

  Increases the size of public expenditure
• Deflation


  A decrease in the general price level
• Deflation


  Increases the real value of debt, making it more difficult for debtors to pay off their debts
• An increase in the real value of debt


  Increases the size of public expenditure
• The pattern of public spending refers to where the expenditure goes in terms of different departments, such as education, healthcare, defence, or social spending, or in terms of the broad nature of spending in terms of public goods, merit goods and transfer payments

  
• Factors affecting the composition of public expenditure

  • Changes in demographic factors
  • State of the economy
  • External shocks (e.g. natural disasters, disease outbreak, global economic crisis)
  • Changes in a country's development over time
  • Political priorities following a change of government
  • Changes in ideological view about role of state vs role of the market in an economy
• As an economy grows and develops

  The size and pattern of government spending will adjust to meet changing needs, such as more spending on transport infrastructure and energy
• Health shocks like the COVID-19 pandemic

  Require considerable increases in public spending on healthcare and support measures
• An ageing population


  Puts extra pressure on public services like healthcare, affecting both the level and distribution of spending
• Fiscal policy and policy priorities/changes

  Can increase the need for public spending, such as on job creation schemes or measures to reduce carbon emissions
• Continuous fiscal deficits and rising debt

  Increase the proportion of public spending going on debt interest repayments
• Public spending on education, healthcare and infrastructure

  Can increase labour productivity and economic growth
• Increases in public spending

  Can crowd out private sector investment through financial and resource crowding out effects
• Public expenditure


  Spending by the government on public services, infrastructure, and other public goods to improve living standards
• Types of public expenditure

  • Current expenditure (recurring spending on items consumed/used up)
  • Capital expenditure (spending on assets/investment)

  
• Increase in public expenditure as a proportion of GDP

  Can lead to: economic growth, reduced unemployment, higher inflation, reduced inequality, budget deficits, crowding out of private sector, impact on productivity, increase in national debt, improved living standards and reduced poverty
• Decrease in public expenditure as a proportion of GDP


  Can lead to: deflation, fall in economic growth, rise in unemployment, reduction in budget deficit and national debt, crowding in of private investment, improved competitiveness
• Factors influencing the size of fiscal deficits


  • Business cycle
  • Government policy
  • Demographic change
  • Interest rates
• Factors influencing the size of national debt


  • Business cycle
  • Government policy
  • Demographic change
  • Interest rates
• Structural deficit


  Part of the deficit not related to the state of the economy, will not disappear when the economy recovers

  
• Governments may deliberately create inflation to reduce the real value of national debt
• Changes in the level of GDP would only explain short-run changes in public expenditure, as the economic cycle changes