What’s it: Government current expenditures represent spending on day-to-day operations, including administrative activities and public services. An example is the expenditure of goods and services for the activities of government offices or to provide public services. Interest payments and subsidies for the current period also fall into this category.
Current expenditures (except for transfer payments) and capital expenditures are GDP components. However, unlike government capital expenditures, current spending does not provide future benefits.
How are government current expenditures financed?
Governments usually rely on taxes to finance their spending. It is their main revenue. Other sources come from the sale or lease of natural resources and contributions from state-owned enterprises, although these are generally relatively small.
However, the government must use loans to cover the shortfall when its revenue is insufficient to finance expenditures. These loans can be short, medium, and long-term. The most common way to get a loan is to issue debt securities such as bills for the short term, notes for the medium term, and bonds for the long term.
What are examples of government current expenditures?
Government current expenditures include money the government spends on goods and services for current period activities. An example is a compensation to civil servants. Other examples include expenditures on goods and services for office activities or public services such as defense, education, health care, social protection, and defense.
Current transfer payments also fall into this expense category. Next, there are interest payments and subsidies.
What is the difference between government current expenditures and government capital expenditure?
Capital and current expenditures are components in calculating GDP (except for current transfer payments). Both represent spending on goods and services, which make up aggregate demand along with household consumption, business investment, and net exports. However, capital expenditure provides future benefits, while current expenditure does not.
Capital expenditures are usually long-term. An example is spending on infrastructure development such as roads, buildings, hospitals, airports, and ports. Such spending is vital to boosting economic activity and increasing long-term output. For example, road construction facilitates the mobility of people and goods and reduces logistics costs. It also encourages increased business activity. So building roads not only creates jobs and income today but also in the future.
Meanwhile, government current expenditure only provides benefits in the current period. It represents routine spending for day-to-day operating activities. For example, the government procures goods and services for equipment in government offices and for providing public services. Or, the government spends money to pay the salaries of government employees.
The next difference between current expenditure and capital expenditure is nominal. Current expenses are usually not too large and are short-term in nature. The government updates it every year.
Meanwhile, capital expenditures take up significant costs like when the government builds infrastructure. The expenditure is not routine, depending on the government’s discretion. For example, the government launched several infrastructure projects to promote the multiplier effect during a weak economy. The project not only absorbs labor but also creates income and demand for goods and services in the economy, stimulating further aggregate demand.
How are government current expenditures reported in GDP calculations?
When we calculate GDP, we add up current expenditures and capital expenditures. The exception is transfer payments. Yes, transfer payments – such as social security and unemployment insurance – are current expenditure items. But, unlike other items, it did not involve the exchange of goods and services in return. Rather, it is one-way: the government transfers it to households rather than payment for their goods and services. Thus, it does not represent spending on goods and services produced by the domestic economy.
After deducting transfer payments, current expenditures are government final consumption expenditures. Suppose we add them to the capital expenditures (known as gross capital formation). In that case, we get the government spending figures for calculating GDP.
