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Public Expenditure Test Questions with Correct Answers

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Public Expenditure Test Questions with Correct Answers Impacts of changes in Public Expenditure: productivity and growth - Answer-Increased government spending can promote economic growth Capital spending provides the infrastructure, such as roads, needed for the economy to run smoothly. Curren...

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  • August 3, 2024
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  • 2024/2025
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Public Expenditure Test Questions
with Correct Answers
Impacts of changes in Public Expenditure: productivity and growth - Answer-Increased
government spending can promote economic growth
Capital spending provides the infrastructure, such as roads, needed for the economy to
run smoothly.
Current spending improves the quality of labour (Education creates the human capital,
healthcare reduces the number of days workers lose from serious illness).
Furthermore, sufficient spending on R&D may not be done by the private sector, so the
government will undertake it to give businesses a long term competitive edge.

However: Free market economists argue that a higher level of public expenditure as a
proportion of GDP is not desirable as the public sector is inefficient due to a lack of the
profit motive

Impacts of changes in Public Expenditure: living standards - Answer-Government
spending can drive large improvements in living standards.
The government corrects market failure and provides public goods, which boost social
welfare.
They also act to reduce absolute poverty by providing benefits and basic goods.
In developing countries, governments are unable to do this, leading to malnutrition, poor
water etc.

However (1): It could be argued that too large of a welfare state could reduce the
incentive to work on, cutting overall output and hence harming living standards.

However (2): It is possible that the government suffers from the principal agent problem
since they make decisions on behalf of the individuals who may have preferred the
money to be spent differently, thus mot maximising their welfare.

Impacts of changes in Public Expenditure: national debt - Answer-Successive years of
budget deficit will increase the size of the national debt.
In turn, this would result in increased interest payments on the national debt in the
future which may mean that less public expenditure is available for spending on public
services such as new schools and hospitals.
Taxes would need to be increased as well to pay the debt off, reducing consumption
and investment, further constraining economic output.

However: Temporary increase to the national debt, due to cyclical budget deficits or
increased capital spending, may provide a 'fiscal dividend' offsetting the impact of the
increased debt as a larger economy can pay it back more readily

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