Government expenditure

Government expenditure Learning outcome Z • Identify the main areas of public expenditure in the UK • Describe the characteristics of public, merit and demerit goods • Evaluate the provision of public and merit goods • Define fiscal policy • Explain the overall pattern of budgetary policy Reading: Unit 20 & 80

Government expenditure • Governments spend money in a range of different areas • Over the 20th Century government spending in the UK rose (as a % of GDP) from around 12% in 1900 to 40% by 2000 • This is a pattern matched in many countries

Government expenditure • The three largest areas of government spending in the UK are: • Social protection i.e. pensions, unemployment allowance etc. • Health care i.e. UK’s National Health Service (NHS) • Education i.e. schools and colleges

Government expenditure • Other significant areas of government spending include: • Social services • Transportation • Industry, agriculture, employment and training • National defence • Public order and safety i.e. police, fire services • Housing and the environment • National debt interest payments

Public, merit and demerit goods Public goods • Public goods are goods that can be consumed by everyone i.e. when it is used by one person it does not reduce the amount available for others • When a public good is provided no person can be excluded from the benefits • Examples include national defence, police, street lighting and prisons

Public, merit and demerit goods Merit goods • A merit good is one that is underprovided by the market • One reason merit goods are underprovided is individuals find it difficult to make a rational decision when the benefits will not be felt for many years i.e. young people may not save for a pension because the benefits will only be felt many years into the future • Another reason merit goods are underprovided is that they create positive externalities i.e. health care and education

Public, merit and demerit goods Demerit goods • A demerit good is one that is overprovided by the market • Consumption of demerit goods creates large negative externalities i.e. alcohol & cigarettes

Provision of public and merit goods • The market will lead to the under-provision of public and merit goods • The government can intervene to correct this market failure, they can do this in a number of ways: • Direct provision; government supplies to the goods free of charge to consumers e.g. roads or education • Subsidised provision; government pays for part of the cost of the good e.g. university education or medicine • Regulation the good is provided by the private sector but the government forces people to buy the merit good e.g. car insurance

Fiscal policy The use of government spending, taxation & borrowing to affect aggregate demand in an economy

Fiscal policy • In the 20th Century the UK has generally had a higher level of government spending than tax revenues (budget deficits) • The government therefore has been forced to borrow, this borrowing is known as the public sector net cash requirement (PSNCR) • The total level of money borrowed is known as the National Debt

Fiscal policy • At times tax revenues have been greater than government spending (budget surplus) • The government can then repay some of the borrowed money and so there is a negative PSNCR • The level of national debt will then decrease

Fiscal policy • Every year in March the Chancellor of the UK will deliver the Budget • The Budget is where the Chancellor will announce all of his plans for government spending, taxation and borrowing (fiscal policy) for the coming year

Government expenditure