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Public expenditure
Edexcel IAL Economics · WEC14 Developments in the Global Economy
Governments spend on very different things: building roads, paying teachers and paying pensions. The specification asks you to classify spending, explain why it changes and assess the effects of its size.
Three types
- Capital expenditure: spending on investment that lasts, such as roads, hospitals, schools and broadband. Adds to the capital stock and long-run aggregate supply.
- Current expenditure: day-to-day spending on running services, such as wages of teachers, nurses and police, medicines, and fuel.
- Transfer payments: payments with no output in return, such as pensions, unemployment and child benefits. They redistribute income but are not part of G in AD (they affect AD through consumption).
Why size and pattern change
- Changing incomes: as countries grow richer, people demand more health and education (they are income elastic), and governments can afford more. In recessions, spending on benefits rises automatically.
- Changing age distributions: an ageing population raises spending on pensions, health and long-term care; a young population needs more education.
- Changing expectations: citizens expect better public services, safety nets and infrastructure over time; crises (pandemics, wars) can change what people expect the state to do.
Significance of public spending as a share of GDP
- Productivity and growth: capital spending on infrastructure, education and research can raise productivity; but large states may be less efficient (no profit motive).
- Crowding out: government borrowing may raise interest rates and reduce private investment; resources used by the state are not available to the private sector (more likely near full employment).
- Level of taxation: higher spending must eventually be financed by higher taxes, which may reduce incentives to work and invest.
The right size is a value judgement: compare countries with large and small states and look at the quality of spending, not just the quantity.
Worked example
Government spending is $420 bn, of which $90 bn is capital spending, $200 bn current spending and the rest transfers. GDP is $1,400 bn. Find public spending as % of GDP and the share of transfers.
- Total / GDP = 420 / 1,400 x 100 = 30%
- Transfers = 420 - 90 - 200 = 130
- 130 / 420 x 100 = 31.0%
Answer: 30% of GDP; transfers are 31.0% of spending.
Check yourself
- Public expenditure is $560 bn and GDP is $1,600 bn. Calculate public expenditure as a percentage of GDP.
Show answer
35 %. 560 / 1,600 x 100 = 35%.
- Which is capital expenditure?
- Building a new motorway
- Paying nurses' salaries
- State pensions
- Buying medicines for hospitals
Show answer
Building a new motorway. A motorway is a long-lasting asset.
- Why are transfer payments not counted in G in the AD equation?
- They are too small
- They are paid by firms
- No good or service is produced in return
- They are always saved
Show answer
No good or service is produced in return. They redistribute income; they enter AD only when recipients spend them (C).
- Explain how an ageing population changes public expenditure.
Show answer
More elderly people means higher spending on state pensions, health care and long-term care, while the share of workers paying taxes falls, putting pressure on government finances.. Older populations need pensions and health care.
- Explain how higher government spending financed by borrowing could crowd out private investment.
Show answer
Government borrowing increases demand for loanable funds, raising interest rates, so firms find borrowing more expensive and reduce investment.. Higher interest rates discourage private investment.
- Transfers are $150 bn out of public spending of $600 bn. What percentage of spending is transfers?
Show answer
25 %. 150 / 600 x 100 = 25%.
Sources
Last updated 8 November 2026. Spotted a mistake? Tell us.