Lecture 3 - Government Finance

- During 2014-15, UK government spending was more than £730 billion.

- The government draws money from many sources and redistributes this across different departments for different purposes.

- But where does the money come from? And where does it go? (look at 2 ppt slides)

Income:

- Almost 50% of income is directly related to people in employment and much more to personal spending.

- Having people in work and earning is vital to national economic health

Expenditure:

- Much more varied, but social security is the biggest single source of expenditure

- Expenditure inversely related to employment revenues

- Where the most money is collected is not where it is spent...

- Income is driven by employment and wages tend to come from wealthier areas whereas expenditure is driven by claimants and demand for service in less affluent areas --> Leads to political tension...

- The rules and conventions that govern how money is allocated play an important role too:

--> London is allocated more to reflect tourist numbers and the government functions there

--> Counter terrorism and national security also important in London

--> Other national centres also located in London

Introduced by Joel Barnett 1978 - 

Taking UK-wide expenditure as 100%, the Barnett Formula currently allocates 97% to England, 117% to Scotland, 111% to Wales and 127% to Northern Ireland.

is it fair? North doesnt get enough and south doesnt get what it should for the taxes they pay...

Infrastructure spending far greater in the south as infrastructure is needed for an effective and efficient economy.

"The loss of benefit income, which is often large, will have knock-on consequences for local spending and thus for local employment, which will in turn will add a further twist to the downward spiral. A key effect of welfare reform will therefore be to widen the gaps in prosperity between the best and worst local economies across the country"

- The government is a major economic force, far larger than most corporations;

- Governments redistribute money, between people and places, through the process of taxing and spending;

- Deciding where and how to collect and spend money is a political process that governments manipulate;

- In this sense, any fiscal regime will inevitably prioritise some people and places over others;

- But are these decisions fair?