This article identifies the main areas of public government expenditure in a country, in this case in the UK.
It describes the characteristics of public goods, merit goods and demerit goods as well as introduces the arguments for and against the provision of public goods and merit goods.
Finally, it explains the overall pattern of budgetary policy including fiscal policy in relation to government expenditure.
Main government expenditure in the UK
Governments spend money in a range of different areas which are covered below. The main areas of government expenditure include:
- Health. Paying for the building of new hospitals and surgeries, salaries for doctors, nurses and other workers, drugs and treatment for patient care and any other equipment which is necessary for the running of a hospital.
- Social services. State pensions for those of the legal retirement age, unemployment benefits for long term unemployed, childcare allowance, TAX credits for low income groups, etc.
- Education. Public kindergartens, primary and secondary schools, further education colleges and research grants for universities.
- Defense. Army, air force, navy.
- Transport. Building and maintenance of transportation infrastructure such as roads, railways, airports, public buses, trains, subways, subsidies for transport services.
- Personal and social services. Social workers, home care assistants and elderly homes.
- Industry. Including investments into agriculture (grants and subsidies for food growth and maintenance), employment and training.
- Public order and safety. Police, prison, fire service and the courts.
- Housing and environment. Grants to build new homes, local repairs and maintenance, rubbish collection, parks and environmental protection.
- Debt interest. Interest charges on government borrowing.
- Other. Overseas aid, the arts, libraries, embassies, contributions to international organizations the country belongs to and special events (World Cup, Olympics, etc.).
Public goods
A public good is a good or service that can be consumed simultaneously by everyone in the society and from which no one can be excluded.
If a public good is not provided by the government, there would be market failure. It is because no consumer would be prepared to pay as all others can benefit. Also, no private firm is prepared to provide a service or good, if no consumer is willing to pay.
Examples of public goods include national defense, police, street lighting, prisons, roads, etc.
Merit goods
Merit goods produce benefits for the whole society not only to the person who is using them.
Positive externalities are created by merit goods. A good example of this is education. The private benefit is the learning process which makes an individual more employable improving the chances of success in the future. And the society benefits because the economy’s ability to produce is increased making the country more competitive which should in-turn improve the standard of living for all.
Some merit goods are under provided by the free market system because consumers do not think about buying them. A good example of this is paying for a pension. When somebody is young they may not think it is important, or they may even think it is a waste of money, so they do not save money for retirement.
Most governments intervene in markets to ensure that public goods are provided and that enough merit goods are supplied. Solutions to under-provision of goods include direct provision, subsidized provision and regulation:
- Direct provision occurs when the government pays for the provision of a good, e.g. roads and, in many developed countries, health care and education.
- Subsidized provision occurs when the government pays for part of the cost to the user, e.g. in many countries universities are subsidized and some have subsidized housing for those on low incomes.
- Regulation is when the government introduces a limit or ban on a market, e.g. in the EU driving a vehicle is limited to those who pay for insurance and many countries have a period when education is compulsory such as in the UK this is between 5 and 16 years old.
Demerit goods
Demerit goods produce negative impact not only to the person who is using them, but also on the whole society.
Consumption of demerit goods produces negative externalities such as tobacco and alcohol. Demerit goods not only cause private costs in the form of diseases of the lungs and liver, but smokers harm those around them, so do drunk driver or those who become violent after consumption of too much alcohol. Diseases from these habits can also reduce the number of days worked reducing the output of an economy.
A demerit good is a good that is over provided by the market, and will be over-consumed without government controls such as TAXation.
Fiscal policy and government expenditure
Fiscal policy is concerned with raising revenue and how to control government expenditure, the level of TAX and government borrowing, in order to influence the aggregate demand in an economy. Fiscal policy usually changes with the ruling party or leader and economic situation.
For example, in the 20th century, the UK often had a higher level of spending than it earned in TAX revenues. This produced a budget deficit and money had to be borrowed.
The amount which a government borrows is referred to as The Public Sector Net Cash Requirement (PSNCR).
The Public Sector Net Cash Requirement (PSNCR)
The Public Sector Net Cash Requirement (PSNCR) is the gap between government income, mainly from TAXes and other sources, and government expenditure, mainly on defense, healthcare, public education, social security, etc.
The Public Sector Net Cash Requirement (PSNCR) measures how much the government needs to borrow to finance its spending plans. It can be calculated using the following formula:
The Public Sector Net Cash Requirement (PSNCR) = Government Expenditure – Government Income
A. Budget Surplus: If government spending is lower than TAX earnings (budget surplus), the government is able to pay back some of the money which it owes. If the government has a budget surplus, The Public Sector Net Cash Requirement (PSNCR) is considered to be negative.
B. Budget Deficit: If government spending is higher than income, borrowing must take place (budget deficit). If the government has a budget deficit, The Public Sector Net Cash Requirement (PSNCR) is considered to be positive.
In order to pay this debt in the future, the government must raise more income than planned expenditure. In this case, the government will be in debt. National Debt is the total amount of borrowing that has not been paid back to lenders
Summary about government expenditure
Governments have many priorities for spending. The most important in the UK are the National Health System (NHS), education, building and maintaining, and roads and defense. Fiscal policy determines where this money will come from. It is mostly gathered through TAXation and government borrowing.
