2.2.4 Government Expenditure

Government Spending

Government spending is the total spending on public goods and services, such as education, health care and defence.

—> Total UK government spending was around £745 billion in 2015. This was 43% of GDP.

Government Current and Capital Spending

Current spending – spending to provide public services

• Salaries of NHS employees

• Drugs used in health care

• Army logistics supplies

Capital spending – spending to provide new public infrastructure

• Construction of new motorways and bridges

• New equipment in the NHS

• Flood defence schemes

How Government Spending can affect Incomes

Welfare state transfers:

• Universal child benefits / unemployment benefit

• Public (state) pensions

State-provided services:

• Education - reduces inequality of market incomes

• Health care – state provided health services

• Social housing

Trade Cycle definition

Fluctuations in economic activity over time, marked by phases of expansion and contraction.

Trade Cycle phases

• Expansion:
  Economy is growing, more jobs and higher incomes. Government may spend less.

• Peak:
  Economy is at its highest point. Government spending stays steady.

• Contraction:
  Economy is shrinking, fewer jobs and lower incomes. Government spends more to help.

• Trough:
  Economy is at its lowest point. Government spending is high to support recovery.

Fiscal Policy definition

Government strategies involving taxation and spending to manage the economy.

Fiscal Policy Components

• Government spending:
  Money the government spends on things like services, infrastructure, education, and defense.

• Taxation:
  Changing taxes to control the economy.
  Lower taxes → encourage spending and growth
  Higher taxes → slow the economy down

Types of Fiscal Policy

• Expansionary Fiscal Policy: Policies designed to stimulate economic activity, typically through increased spending and tax cuts.

• Contractionary Fiscal Policy: Policies aimed at reducing economic activity, often through decreased spending and higher taxes.

Other Influences

• Political factors:
  Government priorities and stability affect how much is spent.

• Social needs:
  Changes in population (e.g. more elderly people) increase spending on things like healthcare and pensions.

• Economic conditions:
  Things like inflation, unemployment, and growth affect spending levels.

• Debt levels:
  High government debt can limit how much can be spent.

Public Debt

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