Public Expenditure (Edexcel A Level Economics A)

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Written by: Steve Vorster

Reviewed by: Jenna Quinn

Capital Expenditure, Current Expenditure & Transfer Payments

Public expenditure (government spending) represents a significant portion of the aggregate demand (AD) in many economies. The expenditure can be broken down into three categories

Current Expenditures: These include the daily payments required to run the government and public sector. E.g. The wages and salaries of public employees such as teachers, police, members of parliament, military personnel, judges, dentists etc. It also includes payments for goods/services such as medicines for the NHS
Capital Expenditures: These are investments in infrastructure and capital equipment. E.g. High speed rail projects; new hospitals and schools; new aircraft carriers
Transfer payments: Payments made by the government for which no goods/services are exchanged. E.g. Unemployment benefits, disability payments, subsidies to producers and consumers etc. This type of government spending does not contribute to GDP as income is only transferred from one group of people to another

Reasons for the Changing Size & Composition of Public Expenditure

Factors Affecting the Size and Composition of Public Expenditure

Changing Incomes	Changing Age Distributions
Countries with low incomes have low tax revenue leading to low government expenditure. As incomes in an economy increase, government tax revenues increase which allows them to increase their expenditure As incomes increase, citizens demand a higher quantity and quality of government services (which are very income elastic) - e.g. library services, cleaner coastal waters, better recycling facilities	Many developed countries have had lower birth rates for decades creating a situation where there is now a large and growing ageing population Life expectancy has also increased due to advances in medicine and nutrition This means that government spending on pension payments and healthcare will increase to support this elderly population
Changing Expectations	The Global Financial Crisis of 2008
As societal norms change, expectations change and this puts pressure on governments to change the substance and delivery mechanism of many of their services. This often results in increased spending e.g. NHS patients wanted online access to their medical records and the Government had to spend significant sums on creating the platform to do that	UK Government borrowing increased significantly in order to facilitate the government spending required to avoid a long-lasting depression This borrowing had to be repaid (with interest) and in the years following the crisis, the UK government cut their expenditure and raised taxes (austerity)

The Significance of the Level of Public Expenditure as a Proportion of GDP

The size of government spending as a proportion of GDP varies from country to country and can have numerous impacts on an economy
- In 2020, it accounted for 51.44% of Sweden's GDP, 40% of the UK's GDP, and 25.37% of Thailand's GDP
Public expenditure has many positive benefits including
- Improvements to the supply-side of the economy through expenditure on infrastructure, health, education etc.
- It improves the equality of opportunity e.g. education for all children
- It raises the standards of living for all e.g. development of parks, libraries etc
- It reduces poverty and decreases inequality in the distribution of income
- It increases economic growth
- It drives innovation by providing long-term seed funding for firms and investing in applied research (some estimates say that global innovation has in the majority been created by public sector funding e.g. the mission to put a man on the moon or the need to keep a soldier safe in a particular scenario)
Public expenditure also has the following drawbacks
- It can have a negative impact on productivity and long-term growth as without a profit incentive the urgency of labour diminishes and resources are used more inefficiently
- It creates opportunity for corruption which can actually decrease the standard of living
- If the government is running a budget deficit they will need to borrow funds from the private sector. This can create a crowding out
- It may require taxation levels to increase in order to pay for the expenditure
- If the spending is not spread evenly throughout different regions of the country, it can create inequality of opportunity e.g. the North/South divide in the UK

Examiner Tips and Tricks

When evaluating public expenditure, it is overly simplistic to say that the public sector is inefficient as it is not driven by profit. There are certainly many examples of this being true but there are likely as many (or more) examples of innovation and efficiencies generated by public expenditure. This varies from country to country e.g. Singapore public spending is considered to be highly efficient and sets a benchmark for private firms. Germany's spending on infrastructure and leisure facilities has made it a desirable place to live which helps to attract top talent, improving efficiency and profits in the private sector.

As with the private sector, the real conversation should be about improving efficiencies in vital public sector services and not necessarily replacing them with private sector services. In many cases replacement by private sector services has resulted in worse product quality and/or service for consumers e.g. Southern Rail Network.

Last updated: 31 August 2024

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