Question

Which of the following is NOT an example of capital expenditure incurred by the government?

• A. Expenditure on maintenance of a government school building
• B. Repayment of loans by the government
• C. Expenditure on construction of a new hospital
• D. Loans given by the government

Answer 1

The Correct Option is A

In economics, capital expenditure refers to funds used by a government to acquire, upgrade, and maintain physical assets such as buildings, infrastructure, and equipment. These expenditures typically provide future economic benefits and are considered investments in long-term resources. 

Let's analyze each option:

• Expenditure on maintenance of a government school building: This is a revenue expenditure because it's used for maintaining existing infrastructure rather than creating or acquiring new assets. It does not provide long-term benefits or future economic value.
• Repayment of loans by the government: Though it involves financial transactions, it is considered as a component of fiscal outflows related to managing public finances and is not directly tied to the creation or enhancement of capital assets.
• Expenditure on construction of a new hospital: This is a capital expenditure as it involves building a new asset that will provide health services and benefits over an extended period.
• Loans given by the government: These are often classified as capital expenditures when they are considered investments expected to generate returns or future benefits.

Conclusion: The expenditure on maintenance of a government school building is not considered a capital expenditure as it does not result in the creation of new capital assets. It is intended for the upkeep of existing infrastructure.

Answer 2

Capital expenditure refers to spending that is used for the acquisition or creation of assets, such as building a new hospital, purchasing machinery, or developing infrastructure. It also includes the repayment of liabilities, such as repaying loans or bonds. This type of expenditure results in the creation of long-term assets or the reduction of existing liabilities.

Capital expenditure is typically non-recurring and contributes to the future economic benefits of the government or organization. It is classified as a non-recurring expense that enhances the overall productive capacity or reduces long-term obligations.

On the other hand, maintenance costs, such as repairs and upkeep of existing assets, are considered revenue expenditure. These costs are recurring in nature and are necessary to maintain the current operational efficiency of assets without creating new ones or reducing liabilities. Revenue expenditure does not add to the value of assets or improve long-term financial standing, making it a routine and recurring cost.

Thus, while capital expenditure builds future assets or reduces liabilities, maintenance costs are essential for sustaining the current operational level and are categorized as revenue expenditure.