4.5.1

Question 1

Capital government expenditure

Answer 1

• Spending on long-term investments and assets - provide benefits over many years
• E.g. infrastructure projects, investments in education or healthcare
• Contributes to economic growth and productivity - enhance physical and human capital

Question 2

Current expenditure

Answer 2

• Day-to-day spending on recurring items
• E.g. salaries, providing public services, running government agencies, pensions
• Maintains existing level of public services - does not contribute to LT economic growth

Question 3

Transfer payments

Answer 3

• Made to individuals or groups without any expectation of goods or services in return
• e.g. social welfare payments, subsidies, grants to local governments
• Redistributive nature - provide support to those in need

Question 4

Reasons for the Changing Size and Composition of Public Expenditure in a Global Context:

Answer 4

• Changing demographics - aging population - increased spending on healthcare and pensions
• Political ideologies - some govs favor social welfare programs - other emphasize defense or infrastructure
• In response to economic crisis - increase spending to stimulate growth/ bail outs - or reduce spending to control deficits (austerity policies )
• Income of the country - lower income govs receive lower tax revs - higher incomes receive higher tax revs and demand more services

Question 5

Impacts of spending on productivity and growth

Answer 5

• Enjoy economies of scale when providing goods - improved productivity
• Provide infrastructure - efficient running of economy - trading
• Education - human capital - skills - MRP
• Healthcare - prevent illness - healthy workforce
• Multiplier effect through spending - focus on areas with high unemployment
• Free market economists disagree - wasteful spending and causes inefficiencies

Question 6

Impacts of spending on living standards

Answer 6

• Correct market failure
• Provide public goods - improve social welfare
• Reduce absolute poverty - provide benefits
• Political system allows society to have a say in gov decisions
• Inefficiencies - disincentivise work - reduced overall output and living standards
• Principal-agent problem - gov vs individual preferences - loss in welfare - fall in living standards

Question 7

Impacts of spending on crowding out

Answer 7

• To spend above tax revenues - gov must borrow from individuals/ businesses - compete with private sector for finance - higher interest rates - discourage investment
• Limited resources in economy - less available for private sector - no real increase in AD
• Free market - investment more efficient by private sector - targeted correctly - less wasteful
• Effect felt most at full employment
• Transfer payment spending does not affect output - no crowding out - redistributive
• Levels of unemployment are high - crowding in - encourage investment - multiplier

Question 8

Impacts of spending on level of taxation

Answer 8

• When levels of spending are high, levels of tax must be high - for sustainable spending
• High levels of tax may have disincentive effect
• Oil-rich countries use rev from oil to finance most of gov spending

Question 9

Impacts of spending on equality

Answer 9

• Spending should increase equality - redistribution - provide minimum standard of living
• Access to basic goods - fair start