Public expenditure — Edexcel A-Level Economics A
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Public expenditure explained
Public expenditure is classified by economic function.
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Capital expenditure creates or improves long-lived assets, such as a hospital building, a road or new machinery, and is recorded as investment in the national accounts. Current expenditure covers day-to-day running costs that are consumed within the period, such as public-sector salaries, medicines, electricity and maintenance. Transfer payments are one-way transfers of income or purchasing power, such as state pensions, jobseeker's allowance or child benefit; the government does not receive a good or service in return, so they are not part of government consumption or investment in GDP. The distinction matters because capital spending adds to the economy's productive capacity, current spending keeps services running, and transfers redistribute income without directly using resources.
Your focus
- Define capital expenditure, current expenditure and transfer payments accurately.
- Classify given examples of government spending into the correct category.
- Explain why transfer payments are excluded from government consumption and investment in GDP.
Public expenditure exam tips
Marking Points
- Capital expenditure is spending on assets that yield benefits over more than one period, for example a new school building, a railway or IT equipment.
- Current expenditure is spending on day-to-day inputs consumed in the period, for example teachers' salaries, drugs, fuel and routine repairs.
- Transfer payments are payments for which no good or service is received in return, for example state pensions, unemployment benefits and child benefit.
- Transfer payments are not counted as government consumption or investment when measuring GDP because they do not purchase current output.
- The classification depends on the nature of the payment, not on which department makes it: a capital grant to a firm can be capital expenditure, while a salary is current expenditure.
Examiner Tips
- 💡Underline the key noun in the option: asset, running cost or transfer, then match it to the definition.
- 💡Eliminate options that describe redistribution when the question asks about resource-using expenditure.
- 💡Check whether the payment is made by government but received without a good or service in return; if so, it is a transfer.
Common Mistakes
- Treating all government spending as current expenditure: correct this by checking whether the payment creates or improves an asset lasting more than one year.
- Counting transfer payments as government consumption in GDP: correct this by recognising that transfers redistribute income and do not buy goods or services.
- Assuming a payment is capital because it is large: correct this by classifying by economic function, not by size or by the identity of the recipient.