Government Expenditure Theories - Current Spending vs Capital Spending - Does it matter what the money is spent on?

Government expenditure (like expenditure by private sector firms) can be categorised into either 'current expenditure' or 'capital expenditure'. Current expenditure is recurring spending or, in other words, spending on items that are consumed and only last a limited period of time. They are items that are used up in the process of providing a good or service. In the case of the government, current expenditure would include wages and salaries and expenditure on consumables - stationery, drugs for health service, bandages and so on.

By contrast, capital expenditure is spending on assets. It is the purchase of items that will last and will be used time and time again in the provision of a good or service. In the case of the government, examples would be the building of a new hospital, the purchase of new computer equipment or networks, building new roads and so on.

The breakdown between these two types of spending is very important. Capital expenditure has a lasting impact on the economy and helps provide a more efficient, productive economy. A new hospital, for example, will be much more efficient and allow more patients to be treated for many years into the future. Current expenditure, however, doesn't have such a lasting impact. Once the money is spent, it is gone and the effect on the economy is simply a short-term one.

This situation is shown on the production possibility frontier below. Point A has a high level of current expenditure and low capital expenditure. The level of growth in the economy is relatively lower. Point B in contrast has a much higher level of government investment and will help create more growth in the long term.

The government must be very careful to strike the right balance between current and capital expenditure.