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How can governments spend?

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How do governments spend?

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Have you ever wondered what 'public spending' consists of? Let’s break it down into three main types: Current Spending, Capital Spending and T ransfer Spending.

The responsibilities over this spending are split between the Scottish Government, UK government and local authorities.

The Office for Budget Responsibility (OBR) have a handy guide on understanding these different types of spending:

A brief guide to the public finances - Office for Budget Responsibility

The independent Office for Budget Responsibility was established in 2010 to monitor the public sector's finances. Twice a year - usually alongside each Budget and Spring or Autumn Statement - we produce detailed forecasts for the coming five years, assessing the likely impact of any policy decisions and expected developments in the economy.

obr.uk

A brief guide to the public finances - Office for Budget Responsibility

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Current Spending is all about the daily expenses needed to keep public services, such as your school or the NHS, up and running.

The UK public sector pay bill (which includes 5.6 million UK public sector employees) is part of this and accounts for around a quarter of all UK government spending at £235 billion in the 2021/22 financial year (IFS).

In 2022-23, the OBR predicts central government departments spend £407 billion on this day-to-day current spending. This is 37% of total government spending.

👩‍⚕️ Cuts in current spending typically translate into real pay cuts for the civil service and lower staff numbers in schools and hospitals.

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Ever heard of Capital Spending? It's a super important tool that the government uses to boost the country's economic growth in the long run.

It mainly involves funding multi-year projects such as building hospitals, schools and infrastructure. Capital spending can encourage further spending and growth through investment in infrastructure the private sector.

The OBR estimates the public sector to spend £113.6 billion on capital investment in 2022-23. This is 10% of total spending.

🚅 The High Speed 2 (HS2) railway line, which will connect London, Birmingham, the East Midlands and North West England is estimated to cost £98bn in capital spending. There is controversy over whether this investment will repay itself. The initial 2010 Command Paper estimated that the project would generate £2.40 for every £1 spent, while the 2020 Lord Berkeley Review suggests it would generate only £0.66 for every £1 spent.

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Now let's talk about transfer spending. This is a powerful tool the government uses to balance things out in the economy. For example, it plays a powerful redistributive role in the economy by targeting spending to low-income households through transfer spending, such as welfare programmes.

In the UK, most transfer spending involves cash transfers through the welfare system. The OBR estimates 54% of this bill will go to state pensions (£110.6 billion).

📈 Transfer spending is ‘demand-led’ which means that the level of expenditure responds to changes in demand in the economy. For example, spending on welfare benefits depends upon how many people require benefits, which depends upon how the economy is performing. This is one example of automatic fiscal stabilisers, where during an economic downturn there is an increase in welfare spending.