Public expenditure

Government spending

  • Aspect of fiscal policy plays a role in shaping the economy’s performance

Capital expenditure

  • Gov spending on long term investments and assets e.g. - infrastructure projects

Current expenditure

  • day to day gov spending on on recurring items, salaries, maintenance, providing public services

Transfer payments

  • Gov payments made to individuals or groups without any expectation of goods or services in return

Reasons for Changing Public Expenditure

  • Economic crises may increase spending to stimulate growth.

  • Demographic changes (e.g., aging population) raise healthcare and pension costs.

  • Political ideologies influence spending priorities.

Public Expenditure & GDP

  • Productivity & Growth: Investment in education and infrastructure boosts economic performance.

  • Living Standards: Welfare programs improve quality of life.

  • Crowding Out: Excessive government borrowing may reduce private sector investment.

  • Taxation Levels: More spending often requires higher taxes.

  • Income Equality: Government spending helps redistribute wealth.

Fiscal Policy, Budget Deficit & National Debt

  • Deficit: Government spending exceeds revenue, leading to borrowing.

  • National Debt: Accumulated government borrowing over time.

  • Economic Justifications for Deficits: Stimulates demand, cushions economic shocks, and funds long-term investment.

  • Risks of High Debt: Increased interest payments, potential tax hikes, and burden on future generations.

Austerity vs. Government Spending

  • Arguments for Austerity: Reduces long-term debt, controls inflation, and encourages private sector growth.

  • Arguments Against Austerity: Can slow economic recovery and reduce public service quality.

Taxation & Its Economic Effects

  • Types of Taxes:

    • Progressive: Higher income earners pay a larger percentage (e.g., income tax).

    • Proportional: Same tax rate for all (e.g., national insurance).

    • Regressive: Lower-income groups bear a higher burden (e.g., VAT).

  • Impact on Aggregate Demand & Supply: Tax changes influence consumer spending, investment, and economic incentives.

Crowding Out & Fiscal Multiplier

  • Crowding Out: High public spending may reduce private investment.

  • Fiscal Multiplier: Measures how much GDP increases with additional government spending.

Global Debt Comparisons & Taxation

  • Countries differ in public debt levels and tax burdens, affecting economic stability and growth strategies.