2.2 - Government expenditure

Question 1

Main influences on government expenditure

Answer 1

• the trade cycle
• fiscal policy

Question 2

Trade/business Cycle

Answer 2

The trade cycle, or business cycle, refers to the fluctuations in economic activity that an economy experiences over a period, typically measured by changes in GDP and other economic indicators.

Question 3

Describe the phases of a business/trade cycle and link it to government spending
- Expansion
- Peak
- Contraction
- Trough

Answer 3

• Expansion:
  > Rising economic activity, employment, and income levels.
  > Governments might reduce spending due to increased tax revenues and lower unemployment benefits.
• Peak:
  > Economic activity is at its highest.
  > Government expenditure may stabilise as revenues peak.
• Contraction:
  > Decreasing economic activity, falling employment, and income levels.
  > Government spending often increases to stimulate the economy through programs like unemployment benefits and public works.
• Trough:
  > Economic activity is at its lowest.
  > Government spending is typically high to counteract the recession.

Question 4

Fiscal Policy Decisions

Answer 4

Fiscal policy involves government decisions about spending and taxation to influence the economy.

Question 5

Budget surplus

Answer 5

Where tax revenue exceeds public expenditure

Question 6

Budget deficit (or PSBR/PSNB)

Answer 6

Where public expenditure exceeds tax revenue - government borrowing

Question 7

Components of fiscal policy decisions

Answer 7

• Government Spending:
  > Includes expenditure on goods and services, infrastructure, education, and defence
  > Eg: increased spending on infrastructure projects during economic downturns.
• Taxation:
  > Adjusting tax rates to control economic activity. Lower taxes can stimulate growth, while higher taxes can cool an overheated economy.

Question 8

Expansionary Fiscal Policy

Answer 8

Used during recessions to boost economic activity through increased spending and tax cuts.

Question 9

Contractionary Fiscal Policy

Answer 9

Used during booms to cool down the economy by reducing spending and increasing taxes.

Question 10

Other influences on government expenditure

Answer 10

• Political Factors: Government priorities, party policies, and political stability can significantly impact spending decisions.
• Social Needs: Demographic changes, such as ageing populations, can increase expenditure on healthcare and pensions.
• Economic Conditions: Inflation rates, unemployment levels, and economic growth can affect government spending.
• Debt Levels: High public debt can constrain government expenditure due to the need for debt servicing.
• External Factors: International events, trade relations, and global economic conditions

Question 11

Public debt

Answer 11

The total amount of money that a government owes to creditors.

Question 12

John Maynard Keynes

Answer 12

Advocated for increased government expenditure and lower taxes during recessions to stimulate demand

Question 13

Milton Friedman

Answer 13

Criticised Keynesian policies, emphasising the role of monetary policy over fiscal policy in managing economic cycles (Monetarism).