Public Expenditure (Edexcel A Level Economics A)

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

1. 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

2. Capital Expenditures: These are investments in infrastructure and capital equipment. E.g. High speed rail projects; new hospitals and schools; new aircraft carriers

3. 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

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