2.2.4 Government spending

GOVERNMENT SPENDING

• spend money on defence, education, the NHS etc.

• impact of a rise in gov spending depends on changes in tax:

  • if gov spending and tax rise by the same amount then there is likely to be no overall increase in demand as people have less disposable income so C decreases but G increases

INFLUENCES OF GOVERNMENT EXPENDITURE

• trade cycle

• fiscal policy

• age distribution of population

TRADE CYCLE

• decisions over gov expenditure may be made to manage AD, and so regulate trade cycle

• recession- gov may increase spending to increase demand to reduce unemployment

• gov spending rises during recession- spend more on unemployment benefits

• booms- gov may decrease spending to decrease demand and reduce inflation

FISCAL POLICY

• some gov spending is fixed from year to year- e.g. schools must be funded and pensions must be paid

• but govs can vary what they spend each year, and this is set out in their budget

• fiscal policy is decisions about gov spending and taxes and will depend on the priorities of gov

• level of gov spending depends on what they lay out in their fiscal policy

AGE DISTRIBUTION OF POPULATION

• an ageing population leads to increase

• gov expenditure on pensions, social care etc. whilst a young population leads to increased spending on education

• the more dependents in the economy (young and old), the higher gov spending