Government expenditure

1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

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

10. 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

11. 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

12. 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