2.3.2 Government spending

Budget

Document of government spending decisions that are set

• Deficit: Spending > income

• Surplus: Spending < income

• Balanced: Spending = income

Fiscal policy

What government decides to do about taxes, borrowing and spending

How does government spending benefit an economy

• Support groups like unemployed, elderly and disabled

• Create jobs in public sector + private sector (construction)

• Could keep prices lower (subsidies)

Recovery/boom effect on government spending

• Government automatically receive more tax revenue(people spend more)

• Government spends less 

  • Less people unemployed - less unemployment benefits

  • People invest in private education/healthcare, less state owned resources used

  • Lower crime - less spent on policing

• Government may lower taxes (may risk inflation), spend more on infrastructure, borrow less and repay debt

Recession/slump

• Government receives less tax revenue

• Spend more on

  • Unemployment benefits

  • Public services

• May raise taxes, spend less on infrastructure, more debt..

Automatic stabilisers

• Government policies(automatic - change on their own, already implemented) that work to minimise fluctuations in real GDP

  • Income taxes: People pay more taxes if they earn more, prevent people from spending too much

  • Benefits: People more likely to claim benefits when economy is weak, keep spending high

Fiscal policies effect on government spending

Governments invest to boost economic activity during recessions

Governments decrease spending during booms - prevent inflation

Economic activity effect on government spending

High economic activity means decreased government spending

In low economic activity, government spending increases (unemployment benefits) to encourage economic activity