Government Expenditure (2.2)

What is the trade cycle?

The fluctuations in economic activity that an economy experiences over a time period

What is another way to refer to the trade cycle?

The business cycle

How is the trade cycle typically measured?

Changes in GDP

4 phases of the trade cycle

1. Expansion

2. Peak

3. Contraction

4. Trough

What is happening during the expansion phase of the trade cycle?

Economic activity, employment, and income levels are rising

How may governments behave during the expansion phase of the trade cycle?

May reduce spending due to increased tax revenue and lower unemployment benefits

What is happening during the peak phase of the trade cycle?

Economic activity is at its highest

How may governments behave during the peak phase of the trade cycle?

Government expenditure may stabilise as revenue peaks

What is happening during the contraction phase of the trade cycle?

Decreasing economic activity, employment, and income levels

How may governments behave during the contraction phase of the trade cycle?

Government spending often increases to stimulate the economy through programs like unemployment benefits and public works

What is happening during the trough phase of the trade cycle?

Economic activity is at its lowest

How may governments behave during the trough phase of the trade cycle?

Government spending is typically high to counteract the recession

What is fiscal policy?

A governments use of taxation and spending to influence the economy

What are the 2 components of fiscal policy?

1. Government Spending

2. Taxation

What 4 factors does government spending include as a component of fiscal policy?

1. Spending on goods and services

2. Spending on infrastructure

3. Spending on Education

4. Spending on Defence

What a real world example of government spending as a component of fiscal policy?

The US governments increased spending on infrastructure projects during economic downturns

How is the adjustment of tax rates used to control economic activity as a component of fiscal policy?

Lower taxes can stimulate growth and higher taxes can cool an overheated economy

What is a real world example of adjusting tax rates as a component of fiscal policy?

The 2017 tax cuts and jobs act in the US aimed to stimulate economic growth

The 2 types of fiscal policy

1. Expansionary Fiscal Policy

2. Contractionary Fiscal Policy

What is expansionary fiscal policy?

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

What is an example of expansionary fiscal policy?

The American recovery and reinvestment act of 2009

What is contractionary fiscal policy?

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

What is an example of contractionary fiscal policy?

Budget surpluses and reduced public spending in the late 1990s in the US

6 factors that influence government spending

1. The trade cycle

2. Fiscal policy

3. Political Factors

4. Social needs

5. Environmental conditions

6. Debt levels

How do political factors influence government spending?

Government priorities, party policies, and political stability can significantly impact spending decisions

How do social needs influence government spending?

Demographic changes, such as aging populations, can increase expenditure on healthcare and pensions

How do environmental conditions influence government spending?

Inflation rates, unemployment levels, and economic growth can affect government spending

How do debt levels influence government spending?

High public debt can constrain government expenditure due to the need for debt servicing

What 3 external factors can influence government spending?

1. International events

2. Trade relations

3. Global economic conditions

Example of social needs affecting government spending

Japan’s rising healthcare costs due to its aging population

Example of environmental conditions affecting government spending?

Increased unemployment benefits during high unemployment periods

Example of debt levels affecting government spending?

Greece’s austerity measures post 2000 financial crisis

Example of external factors affecting government spending?

Increased defence spending during geopolitical tension

What did Keynes advocate for during recessions?

Increased government spending and lower taxes to stimulate demand

What economist agreed with Keynes’ ideas to help with recessions?

Friedman