4.5.1 public expenditure

NHS IT scheme failure

The infamous NHS IT scheme in 2002 proved to be a massive failure in terms of public expenditure

The original cost of £6 billion doubled and became £12 billion by the time the project was cancelled

Aim? To connect whole of NHS

What does the NHS IT scheme show?

• government failure

• inefficiency

• opportunity cost

• poor productivity of spending

HS2?

March 2010

 

Aim? Britain's rail network by building a high-speed line connecting London, Birmingham, Manchester and Leeds

 

£37.5 billion in 2009

 

Estimated cost for remaining HS2 phase 1 (London to Birmingham) is between £49 billion and £56.6 billion - 2019 prices

Modifications to HS2? What does this show?

Current proposed route? London Euston to Birmingham Curzon Street.

 

 

Costing so much more yet giving so much less → gov failure, opp cost

What is resource crowding out?

• Impact on growth?

More gov spending means using more resources, and reduces those available for firms, negatively affecting the economy as firms are unable to produce as much as they want

→ Decrease in GDP, there is less to sell

Keynes’ evaluation of resource crowding out?

Are funds in the modern global financial industry so limited that gov projects would use them all up?

What is financial crowding out?

• Negative effects on economy?

Government borrowing will reduce funds available for firms, negatively affecting the economy as businesses won’t be able to borrow the money they need

→ decrease in investment, shift in AD

→ decrease in productivity, decrease in capital goods, less production in a given time

Keynes’ evaluation of financial crowding out?

Keynesians argue crowding out is unlikely during a recession because:

• firms are not investing anyway

• confidence is low

• banks have spare money to lend

• there is spare capacity in the economy

So government borrowing may not reduce private investment

When is crowding out more likely?

• the economy is near full capacity

• inflation is rising

• interest rates are increasing

• resources are scarce

In this case, government and firms compete for finance/resources.

Reasons for changing size and composition of public expenditure in a global context? (5)

• Economic cycle i.e. public expenditure increases during recessions

• Political ideologies e.g. right wing - tax cuts, left-wing - increase G

• Changing demographics

• Level of poverty/inequality

• Level of provision of merit goods