Pulbic finance

There are 4 elements of public finance: public expenditure, taxation, public sector net borrowing, public sector net debt.

Public expenditure:

Current expenditure: The spending on day to day goods and services such as wages for a nurse, salries of teachers, drugs for the NHS.

Capital expenditure: The spending of infrastructure of long term investment projects such as building a new hospital or school

Transfer payments: Payments such as unemployment benefits (there is no production in return)

Objectives of public expenditure:

Redisturibution of income - a more equal society

Protection and saftey of the public, for example spending on the Forces and Police

Provision of public goods, e.g street lighting (no one would produce if left to market)

Supply of goods/services with positive externalities such as education/leisure

Expenditure to deal with external costs such as polluyion and waste

Analysis of public spenditure:

A increase in public expenditure will cause an increase AD, as it represents an injection, may also increase aggregate supply.

There is an oppertunity cost accosciated with each choice th government makes, e.g. should the money have been spent on a school instead of a hospital?

Public expenditure could result in government failure (when intervention results in a welfare loss)

The size and pattern of public expenditure

- level of GDP, generally when GDP rises the demand for goods and services also does, it is income elastic

- population and age, with a higher population there is greater stress on public services such as hospitals, also a higher age population will require greater medical attention

- political priorities, some parties may have promised changes to certain services

- redistribution of income, over recent years there has been a higher level of spending on benefits for those in relative poverty, e.g. means tested benefits

- discretionary fiscal policy, there has been an increase in this in recent years

Taxation

May be divided into type; direct (levied on income and wealth, cannot be paid to anyone else) and indirect(everyone pays the same)

The main direct taxes are income, corporation, capital gains. The main indirect taxes are VAT, excise duties and tariffs.

Analysis:

- a increase in tax represents a leakage from the circular flow of income and will have a downward multiplier effect…