2.2.4 Government expenditure (G) Flashcards
Government spending
spending by the public sector on goods and services such as education , health care and defence .
Government expenditure in the UK
- Total UK government spending in 2015 was £745 billion.
- This amounted to 43% of GDP.
- £50 billion was allocated to capital spending.
- Education and health spending accounted for 22% of GDP.
- Total local government current expenditure on services in 2023-24 was £158.7 billion, up from £154.3 billion in 2022-23.
- Total local government capital expenditure on services rose from £20.6 billion to £23.1 billion over the same period.
What are the top three biggest areas of government expenditure in the UK?
- Social Protection ( Welfare payments such as state pension , universal credit )
- Health care services
- Education
What are the components of government expenditure?
Current spending
Welfare spending
Capital spending
Welfare spending
pensions, benefits, transfer payments
Current Spending
Reccuring spending: Maintenance of public services or payment of public sector wages
Capital spending
investment projects such as infrastructure eg bridges roads hospitals
The trade cycle
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 .
How dows the trade cycle influence government expenditure?
Expansion: Economic activity rises, leading to increased tax revenues and lower unemployment benefits. Governments may reduce spending or use tax revenue to pay back debt or fund public goods.
Peak: Economic activity reaches its highest, and government expenditure may stabilize.
Contraction: Economic activity declines, employment falls, and income levels drop. Governments often increase spending to stimulate the economy through unemployment benefits and public works.
Trough: Economic activity is at its lowest, and government spending is typically high to counteract the recession.
Fiscal policy
A government’s policy regarding taxation and public spending. It can be loose (with the emphasis on increased spending and lower tax revenue to boost economic activity, with the acceptance of a wider fiscal deficit) or tight (with the emphasis on cutting spending and raising extra tax revenue, resulting in a slower-growing economy).
How does fiscal policy influence government expenditure?
Some government spending is fixed from year to year. For example, schools must be funded, and pensions must be paid . However , governments can vary what they spend each year , and this is set out in their budget.
Government Spending : Includes expenditure on goods and services , infrastructure , education , and defense . Example : The U.S. government’s 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 . Example: The 2017 Tax Cuts and Jobs Act in the U.S. aimed to stimulate economic growth .
Types of fiscal policy
Expansionary Fiscal Policy
Contractionary Fiscal Policy
Expansionary Fiscal Policy
Used during recessions to boost economic activity through increased spending and tax cuts . Example : The American Recovery and Reinvestment Act of 2009 .
Contractionary Fiscal Policy
Used during booms to cool down the economy by reducing spending and increasing taxes . Example : Budget surpluses and reduced public spending in the late 1990s in the U.S.
Influences on government expenditure
Political Factors : Government priorities , party policies , and political stability can significantly impact spending decisions .
Social Needs : Demographic changes , such as aging populations , can increase expenditure on healthcare and pensions Example : Japan’s rising healthcare costs due to its aging population .
Economic Conditions : Inflation rates , unemployment levels , and economic growth can affect government spending . Example : Increased unemployment benefits during high unemployment periods
Debt Levels : High public debt can constrain government expenditure due to the need for debt servicing . Example : Greece’s austerity measures post - 2008 financial crisis .
External Factors : International events , trade relations , and global economic conditions . Example : Increased defence spending during geopolitical tensions .
How did John Maynard Keynes influence government expenditure?
Advocated for increased government expenditure and lower taxes during recessions to stimulate demand ( Keynesian Economics ) .
How did Milton Friedman influence government expenditure?
Criticized Keynesian policies , emphasizing the role of monetary policy over fiscal policy in managing economic cycles ( Monetarism ) .
Public Debt
The total amount of money that a government owes to creditors .
Monetary Policy
Central bank actions involving the money supply and interest rates to influence the economy .
Budget deficit
Government spending > tax revenue in a fiscal year
Budget surplus
Government spending < tax revenue in a fiscal year
Fiscal year
A one - year period that companies and governments use for financial reporting and budgeting
National debt
Total stock of debt over time / accumulation of budget deficits
Government borrowing
The amount the govemment must borrow each year to finance their spending
Golden Rule
a government budget should be equal over a business cycle i.e. their budget surplus and budget deficit should cancel out by the end of the recession/boom cycle
