2.2.4 Government expenditure

Two main influences on government expenditure

The trade cycle and fiscal policy

The trade cycle

Decisions over gov expenditure made to regulate trade cycle. In a recession, the gov may increase spending in order to increase demand to reduce unemployment. Automatically rises during a recession and during booms the gov may decrease spending to reduce inflation.

Fiscal policy

A demand side policy. Governments use fiscal policy to influence the economy and involves changing gov spending and taxation.

Different types of fiscal policy

Discretionary, expansionary and contractionary

Fiscal policy: Discretionary

A policy which is implemented through one off policy changes

Fiscal policy: Expantionary

May use this during periods of economic decline. Involves increasing spending on transfer payments or on boosting AD.

Fiscal policy: Contractionary

Might use contractionary fiscal policy by decreasing expenditure on purchases and transfer payments. Reduces the size of the gov budget deficit