2.2.4 Government Spending (G)

A) Definition of Government Spending

  • Government spending (G) = consumption and investment by the government

  • Includes:

    • Infrastructure (roads, schools)

    • Healthcare, education, defence

  • Does NOT include transfers

B) Transfers

  • Transfers = payments where no goods/services are exchanged

  • Money simply changes hands

Examples:

  • Benefits

  • Subsidies

  • Pensions

  • Foreign aid

  • Remittances

C) Factors Affecting Government Expenditure

1. The Trade (Economic) Cycle

  • The economy goes through phases:

Phase

What happens

Effect on Government Spending

Expansion

Growth, rising incomes

Spending may fall (less welfare needed)

Peak

Economy at highest level

Spending stabilises

Contraction (Recession)

Falling GDP, rising unemployment

Spending increases

Trough

Lowest point

Spending highest to stimulate economy

✔ Key idea:

  • Governments spend more in a bust/recession (as in your notes)

2. Fiscal Policy

  • Fiscal policy = government decisions on taxation and spending

Types of Fiscal Policy

a) Expansionary Fiscal Policy

  • Used in recession

  • ↑ Government spending

  • ↓ Taxes

  • Goal: increase aggregate demand (AD)

b) Contractionary Fiscal Policy

  • Used in booms

  • ↓ Government spending

  • ↑ Taxes

  • Goal: reduce inflation

✔ Political influence:

  • Different governments choose different levels of spending

  • e.g. some governments favour higher public spending

3. Political Factors

  • Government priorities (e.g. healthcare vs defence)

  • Ideology and party policies

  • Example idea:

    • Some governments aim to borrow only for investment, not day-to-day spending

4. Social Factors

  • Demographics affect spending:

    • Ageing population → ↑ pensions & healthcare

  • Inequality → ↑ welfare spending

5. Economic Conditions

  • High unemployment → ↑ benefits

  • Inflation → ↑ cost of public services

  • Economic growth → ↑ tax revenue → may reduce need to spend

6. Debt Levels

  • High national debt → limits spending

  • More money spent on interest payments (debt servicing)

7. External Factors

  • Wars / geopolitical tensions → ↑ defence spending

  • Global crises → ↑ support measures

  • Trade/global economy changes

D) Key Economic Definitions

1. Fiscal Deficit

  • When government spending > tax revenue (in one year)

2. National Debt

  • The total accumulation of past deficits

  • Built up over time

E) Key Economic Theories

1. John Maynard Keynes

  • Argued governments should:

    • Increase spending in recessions

    • Stimulate demand

  • Supports active fiscal policy

2. Milton Friedman

  • Believed:

    • Government intervention is less effective

    • Focus should be on monetary policy (money supply)

F) Summary (Exam-Ready)

Government expenditure is influenced by:

  • Economic cycle (spend more in recessions)

  • Fiscal policy decisions (tax + spend choices)

  • Political priorities

  • Social needs (e.g. ageing population)

  • Debt constraints

  • External/global factors

Quick Evaluation Point (for essays)

  • Government spending can:

    • Stabilise the economy (Keynesian view)

    • BUT may cause:

      • Higher debt

      • Inflation

      • Inefficiency