Transcript Public-spending

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What determines government spending
In pairs, why might government spending in a country be
high or low?
Why spending is high or low
• Ability to raise tax revenues or to borrow in order to pay for
public services
• In general, tax revenues are lower for developing countries.
Why?
– Actual taxes are lower because of lower incomes, which means actual
government spending is also low
– Taxes as a percentage are also low because of:
• Key reason is low capacity to raise tax, principally because low household
incomes means households cannot afford to pay tax, whether direct or
indirect.
• No scope for other taxes like council tax, stamp duty (on share trading or
purchase of housing), inheritance etc etc
• The hidden/subsistence economy means incomes are hidden, and there may
be non-compliance as well
Developed countries
• Choice of electorate
– US believe individuals should look after themselves. Tax rates
should be low, and the government’s involvement in the
economy should be limited
– It appears this is not the choice in general of countries in the
Euro area, and Nordic countries too (though this may be
changing a little)
– In the UK, the Conservatives essentially believe individuals and
families should bear the responsibility for themselves, but with
a safety net (welfare) and an NHS (unlike the US). The Labour
Party believes in a more active role for the state, and believes
support for low income households should be greater
Matching exercise
• IMF database
Size of Government –developed countries
Country
Finland
France
Denmark
Italy
Sweden
Greece
Portugal
Netherlands
Germany
Spain
United Kingdom
Japan
Canada
Ireland
Australia
United States
Switzerland
Korea
Singapore
Average
Gov’t spending % GDP 2014
58.3
57.5
56.9
51.1
50.4
49.3
49.0
46.1
44.3
43.6
41.4
40.3
39.4
38.3
37.0
35.7
31.4
20.0
18.2
40.3
Other reasons spending is high or low at a
given time
• Fiscal policy
– Automatic stabilisers act to increase government spending as %
of GDP in recessions (and taxes are lower as % of GDP)
– Government active fiscal policy will also influence spending as %
GDP
– At present, most developed countries are reducing spending as
% of GDP because of large deficits
• Societal changes
– May put pressure on spending, eg from ageing population
Government spending - developed
3 main items of spending undertaken by governments:
1. Current spending, to provide goods/services for the population
a.
Spending on public goods like defence or legislature
•
b)
This is to provide goods/services that the market would not provide
Spending on merit goods like health, education and transport
•
These goods could be provided by markets, and in some countries are (no NHS in
the US). In the UK we believe these services would be under-provided by the
market, and that they should be available to all at no cost (though funded by tax
payers)
2. Transfers (not part of G in aggregate demand)
–
Take money from some members of society in tax, to help others who
are disadvantaged, eg unemployed, sick/disabled, and also to pay
pensions
3. Government investment
–
Spending on goods which will support future consumption. Basically
means infrastructure
UK government spending
2010
£billion
Spending
2015
% GDP
Spending
% GDP
Note
Health Care
117
7.8%
134
7.4%
Merit good
Education
88
5.9%
84
4.6%
Merit good
Transport
23
1.5%
19
1.1%
Merit good
228
15.2%
237
13.1%
Defence
43
2.9%
45
2.5%
Public good
Protection
34
2.3%
30
1.7%
Public good
77
5.1%
75
4.1%
Pensions
116
7.7%
150
8.3%
Transfer
Welfare
111
7.4%
111
6.1%
Transfer
227
15.1%
261
14.4%
Interest
31
2.1%
46
2.5%
Ouch
General Government
16
1.1%
14
0.8%
Various
Other Spending
94
6.3%
113
6.3%
Various
Total Spending
673
44.9%
748
41.4%
Total merit goods
Total public goods
Total transfers
GDP
1,500
1,808
Source: ukpublicspending.co.uk
These numbers include capital spending of about £73 billion in 2015/16
Research project – 3 groups
• Investigate and produce a summary report showing for
chosen country – eg Malaysia, Kenya, South Korea:
• Tax revenues as % GDP for the last year
• Government spending as % GDP for the last year and an idea
of how this has changed over time
• A breakdown of government spending into main categories,
including where possible
–
–
–
–
–
Capital investment
Defence spending
Welfare
Health
Education
Output gap
Planned spending UK
Planned spending UK
Impact of Autumn Statement on tax
distribution