public expenditure

public expenditure includes everyhting a government spends its money on.

types of public expenditure

capital expenditure: government spending on assets which has long term benefits. such as new schools and healthcare.

current exenditure: government spending on recurring costs such as wages and raw materials.

transfer payments: government spending without getting anything in return such as subsidies and benefits.

factors influencing public expenditure

age distribution: with an aging population the government needs to prioritize spending on healthcare to deal with the aging populations health problems. they also need to spend on pensions to make sure everyone has money to live off. a younger population requires higher spending on education. this help increase human capital.

incomes: wagners law states that demand for public sector goods are income elastic. this means that as incomes increase public expenditure also increases. lower income counntries need more basic necesities which leads to lower public expenditure. however some public expenditure would go towards inferior goods which means that demand for governmetn goods and services lower and so does public expenditure.

political values: if people trust the government then they would vote for a government that promises high public expenditure and high taxes. however if the people dont trust the government they would vote forn governments that promise low public expenditure and taxes.

changes in public expenditure

productivity and growth: by increasing capital expenditure on new hospitals and current expenditure on hiting new doctors their would be a rise in AD. this creates economic growth. workers would also be mor ephysically fit which increases productivity shifitng lras to the right. however, it depends how the public expenditure is used. things such as bureaucracy and over spending would not increase productivity.

living standards and equality: for example an increase in spending on healthcare would increase living standards. spending on benefits would reduce the gap between thee rich and poor which can incerase equality. for example increase in job seekers allowance would increase incomes, increase living standards and reduce inequality. better healthcare can increase productivity leading to higher incomes and living standards. however public expenditure might not go towards the services that benefit the poor. it could go towards the military.

resource crowding out: when the government increases public expenditure and all resources are being used efficiently making them not available or more expensive to private firms. this moves the economy along the ppf. which means there are less resources available for private sectore firms.

financial crowding out: this is when the government borrows money to increase public expenditure which leads to an increase in the interest rate. this discourages private firms from taking out loans for investment.