Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting the acquisition by governments of goods and services for current use, to directly satisfy the individual or collective needs of the community, is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment (government gross capital formation). These two types of government spending, on final consumption and on gross capital formation, together constitute one of the major components of gross domestic product.
Government spending can be financed by government borrowing, or taxes. Changes in government spending is a major component of fiscal policy used to stabilize the macroeconomic business cycle.
Video Government spending
Macroeconomic fiscal policy
Government spending can be a useful economic policy tool for governments. Fiscal policy can be defined as the use of government spending and/or taxation as a mechanism to influence an economy. There are two types of fiscal policy: expansionary fiscal policy, and contractionary fiscal policy. Expansionary fiscal policy is an increase in government spending or a decrease in taxation, while contractionary fiscal policy is a decrease in government spending or an increase in taxes. Expansionary fiscal policy can be used by governments to stimulate the economy during a recession. For example, an increase in government spending directly increases demand for goods and services, which can help increase output and employment. On the other hand, contractionary fiscal policy can be used by governments to cool down the economy during an economic boom. A decrease in government spending can help keep inflation in check. During economic downturns, in the short run, government spending can be changed either via automatic stabilization or discretionary stabilization. Automatic stabilization is when existing policies automatically change government spending or taxes in response to economic changes, without the additional passage of laws. A primary example of an automatic stabilizer is unemployment insurance, which provides financial assistance to unemployed workers. Discretionary stabilization is when a government takes actions to change government spending or taxes in direct response to changes in the economy. For instance, a government may decide to increase government spending as a result of a recession. With discretionary stabilization, the government must pass a new law to make changes in government spending.
John Maynard Keynes was one of the first economists to advocate for government deficit spending as part of the fiscal policy response to an economic contraction. According to Keynesian economics, increased government spending raises aggregate demand and increases consumption, which leads to increased production and faster recovery from recessions. Classical economists, on the other hand, believe that increased government spending exacerbates an economic contraction by shifting resources from the private sector, which they consider productive, to the public sector, which they consider unproductive.
In economics, the potential "shifting" in resources from the private sector to the public sector as a result of an increase in government deficit spending is called Crowding Out. The figure to the right depicts the Market for Capital, otherwise known as the Market for Loanable Funds. The downward sloping demand curve D1 represents demand for private capital by firms and investors, and the upward sloping supply curve S1 represents savings by private individuals. The initial equilibrium in this market is represented by point A, where the equilibrium quantity of capital is K1 and the equilibrium interest rate is R1. If the government increases deficit spending, it will borrow money from the private capital market and reduce the supply of savings to S2. The new equilibrium is at point B, where the interest rate has increased to R2 and the quantity of capital available to the private sector has decreased to K1. The government has essentially made borrowing more expensive and has taken away savings from the market, which "crowds out" some private investment. The crowding out of private investment could limit the economic growth from the initial increase government spending.
Maps Government spending
Current use: final consumption expenditure
Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is called government final consumption expenditure (GFCE.) It is a purchase from the national accounts "use of income account" for goods and services directly satisfying of individual needs (individual consumption) or collective needs of members of the community (collective consumption). GFCE consists of the value of the goods and services produced by the government itself other than own-account capital formation and sales and of purchases by the government of goods and services produced by market producers that are supplied to households - without any transformation - as "social transfers" in kind.
National defense spending
The United States spends vastly more than other countries on national defense. The table below shows the top 10 countries with largest military expenditures as of 2015, the most recent year with publicly available data. As the table suggests, the United States spent nearly 3 times as much on the military than China, the country with the next largest military spending. The U.S. military budget dwarfed spending by all other countries in the top 10, with 8 out of countries spending less than $100 billion in 2016.
Healthcare and medical research
Research Australia found 91% of Australians think 'improving hospitals and the health system' should be the Australian Government's first spending priority.
Crowding 'in' also happens in university life science research Subsidies, funding and government business or projects like this are often justified on the basis of their positive return on investment. Life science crowding in contrasts with crowding out in public funding of research more widely: "10% increase in government R&D funding reduced private R&D expenditure by 3%...In Australia the average cost of public funds is estimated to be $1.20 and $1.30 for each dollar raised (Robson, 2005). The marginal cost is probably higher, but estimates differ widely depending on the tax that is increased."
Infrastructure and investment: gross fixed capital formation
Government acquisition intended to create future benefits, such as infrastructure investment or research spending, is called gross fixed capital formation, or government investment, which usually is the largest part of the government. Acquisition of goods and services is made through production by the government (using the government's labour force, fixed assets and purchased goods and services for intermediate consumption) or through purchases of goods and services from market producers. In economic theory or in macroeconomics, investment is the amount purchased per unit of time of goods which are not consumed but are to be used for future production (i.e. capital). Examples include railroad or factory construction.
Infrastructure spending is considered government investment because it will usually save money in the long run, and thereby reduce the net present value of government liabilities.
Spending on physical infrastructure in the U.S. returns an average of about $1.92 for each $1.00 spent on nonresidential construction because it is almost always less expensive to maintain than repair or replace once it has become unusable.
Likewise, government spending on social infrastructure, such as preventative health care, can save several hundreds of billions of dollars per year in the U.S., because for example cancer patients are more likely to be diagnosed at Stage I where curative treatment is typically a few outpatient visits, instead of at Stage III or later in an emergency room where treatment can involve years of hospitalization and is often terminal.
Transfer payment spending
Government expenditures that are not acquisition of goods and services, and which represent transfers of money such as social security payments, are called transfer payments. These payments are considered to be exhaustive because they do not directly absorb resources or create output. In other words, transfers are made without an exchange of goods or services. Examples of certain transfer payments include welfare (financial aid), social security, and government giving subsidies to certain businesses (firms).
Per capita spending
In 2010 national governments spent an average of $2,376 per person, while the average for the world's 20 largest economies (in terms of GDP) was $16,110 per person. Norway and Sweden expended the most at $40,908 and $26,760 per capita respectively. The federal government of the United States spent $11,041 per person. Other large economy country spending figures include South Korea ($4,557), Brazil ($2,813), Russia ($2,458), China ($1,010), and India ($226). The figures below of 42% of GDP spending and a GDP per capita of $54,629 for the U.S. indicate a total per person spending including national, state, and local governments was $22,726 in the U.S.
As a percentage of GDP
This is a list of countries by government spending as a percentage of gross domestic product (GDP) for the listed countries, according to the 2014 Index of Economic Freedom by The Heritage Foundation and The Wall Street Journal. Tax revenue is included for comparison.
Public social spending comprises cash benefits, direct in-kind provision of goods and services, and tax breaks with social purposes provided by general government (that is central, state, and local governments, including social security funds).
See also
- Rahn curve
- Government operations
- Public expenditure
- Public finance
- Government budget
- Government waste
- Fiscal policy
- Tax
- Mandatory spending
- Taxpayers unions
- Eurostat
- Government spending in the United Kingdom
- Government spending in the United States
References
External links
- OECD Government spending statistics
- Canadian Governments Compared
- Eurostat's government spending per sector
Source of article : Wikipedia
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