2.2.4: Government Expenditure (G)

Key Influences on Government Expenditure

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.

Phases:

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 stabilize 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.

Fiscal Policy Decisions

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

Components:

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

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.

Other Influences

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 defense spending during geopolitical tensions.