Government Expenditure Worksheet - Expenditure on what?

This worksheet deals with a variety of issues about how the government should spend its money. It considers the effect of government expenditure on living standards, the distinction between current and capital expenditure, the role of transfer payments and how government expenditure can help redistribute income.

There is also a printable version of this worksheet available for classroom or personal use with spaces to fill in the answers.

Step 1 - Governments making life better

Go to the explanation of government expenditure and look at the breakdown of government expenditure. What are the largest seven spending departments?

Different types of government expenditure will have different effects on the standard of living. For example, an increase in government expenditure of £1bn on defence will have far less of an impact on the standard of living than the same increase in spending on health.

Now re-rank the above seven departments according to the effect their spending will have on the standard of living. Number 1 should be the department whose spending will increase the standard of living the most, number 7 the one that has the least effect.

Write a short paragraph giving a justification for your choices of numbers 1 and 2 and numbers 6 and 7.

However, it is not only the areas that the government spends money on that are important, but also how it spends it. There are two types of spending - current expenditure and capital expenditure. Use the government expenditure theory section of the Virtual Economy to find out definitions of these two types of spending.

Using education spending as an example, try to think of five examples of current education expenditure and five examples of capital education expenditure:

Current education expenditure	Capital education expenditure
1...	1...
2...	2...
3...	3...
4...	4...
5...	5...

Step 2 - Transferring spending

Use the government expenditure theory section to find out what transfer payments are. Note down a definition.

Give three examples of transfer payments:

Which government department deals mainly with transfer payments?

Use either the government expenditure theory section of the Virtual Economy or the model input form to find out four examples of transfer payments that help to redistribute income from the better-off to the less-well-off. (N.B. Look mainly at the benefits section.)

Step 3 - 'Robbing Hood'

As the level of growth in the economy changes, so the amount the government has to spend on benefits changes as well. In the paragraph below, delete words in italics as appropriate to show what happens as the economy enters recession.

A decrease in economic growth leads to an increase / decrease in aggregate demand. This leads to firms increasing / decreasing the level of employment. This means that there is an increase / decrease in income and more / less people on benefits. Government spending therefore increases / decreases. As unemployment increases / decreases, there will also be an increase / decrease in the government's tax revenue, and the combination of the tax and expenditure changes means that the PSNCR will increase / decrease. This type of government expenditure change where the government has no direct control over it is called automatic / discretionary spending.

Now try using the model to see how changes in the tax and benefit system will affect individual families. Use the model to try to achieve the following:

• Make a family earning £20,000 per annum around £5 per week worse off
• Make an unemployed family around £2 per week better off
• Make a single person earning £10,000 per annum around £3 per week better off

N.B. Just aim to make changes of approximately these levels.

What policies did you use to achieve this?

Policy change	Amount of change

What disadvantages might these policies have?

Step 4 - Incentives - a tax or a benefit?

The gap between tax and benefits will have an effect on the incentive of people to work. If there is only a small gap between what people can earn on benefits and what they earn when they work, then there is only a limited incentive to work. The bigger the gap, the bigger the incentive to work.

What disadvantages might there be to increasing the level of benefits?

Use the Library (3rd floor) to find out what Classical economists believe should be done to the level of benefits and why.
(N.B. Use the 'theories' section of Classical economists.)

Step 5 - Beat Gordon at his own game

Try using the model to see if you can achieve the following by changing just the level of government expenditure (including benefits):

• Redistribute income slightly from better-off to less well-off (measure this by the impact on different families' incomes)
• Boost the level of economic growth above the forecast level
• Keep inflation below 4%

What policies were most effective at achieving these goals? Note them down in the table below:

Policy change	Amount of change

What disadvantages might these policies have?