ECON3130 - Determinants of Aggregate Demand II: Government Spending

HM Treasury:
- The UK government, through the HM Treasury, actively uses fiscal policies to stimulate economic growth.
- Examples include initiatives like the Oxford-Cambridge Growth Corridor, projected to boost the UK economy by $£78$ billion by 2035.
- Infrastructure projects, such as the expansion of Heathrow, are also backed to kickstart growth.
World Bank Data:
- Government spending can be analyzed using World Bank data under World Development Indicators
- It is categorized under “General government final consumption expenditure” as a percentage of GDP.
- Various countries have differing percentages of GDP allocated to government spending, as shown in the data for 2010 and 2023.

Government Debt:
- Measured as general government gross debt at the end of each quarter.
- Table 1 (from the provided data) illustrates the UK's debt in £ billion and as a percentage of GDP from Quarter 3 2020 to Quarter 2 2022.
- For example, in Q2 2022, the debt was $£2,436.7$ billion, or $101.9\%$ of GDP.
Government Deficit:
- Represents the shortfall when government spending exceeds income over a period.
- Table 2 (from the provided data) shows the UK's general government deficit in £ billion and as a percentage of GDP from Quarter 3 2020 to Quarter 2 2022.
- In Q2 2022, the deficit was $£8.7$ billion, or $0.4\%$ of GDP.

John Maynard Keynes:
- Keynes's work, particularly "The General Theory of Employment, Interest and Money" (1936), provides the theoretical basis for using government spending to influence aggregate demand.
Fiscal Policy:
- Involves using government spending, taxation, and benefit systems to influence the economy and achieve macroeconomic objectives.
- It operates through changes in government expenditure and revenue, affecting both aggregate demand and aggregate supply.
- $AD = C + I + G + X - M$ , where G represents government spending.

Automatic Changes:
- Occur naturally in response to economic fluctuations.
- During economic growth, tax revenue increases, and benefit spending decreases, improving the budget position.
- In a recession, the reverse occurs, worsening the budget position automatically.
Discretionary Changes:
- Involve deliberate changes in tax rates, benefits, or discretionary spending items by the government.
- These are not directly linked to the current income levels in the economy but are policy choices.

Key Areas:
- Defense
- Social security benefits (payments to individuals who are ill or unemployed)
- Education
- Repayments on previous borrowing (debt interest).
UK Public Sector Spending (2025-26 Estimates):
- Total Managed Expenditure (TME) is expected to be around $£1,335$ billion.
- Major allocations include:
  - Social protection: $£379$ billion
  - Health: $£277$ billion
  - Education: $£146$ billion
  - Debt interest: $£126$ billion
  - Defence: $£83$ billion
  - Transport: $£66$ billion
  - Public order and safety: $£55$ billion
  - Industry, agriculture, and employment: $£51$ billion
  - Personal social services: $£51$ billion
  - Housing and environment: $£44$ billion
  - Other: $£56$ billion

Direct Taxes:
- Levied on household incomes and firm profits.
- Examples:
  - Income tax (on employees' income)
  - Corporation tax (on firms' profits)
  - Capital gains tax (on profits from selling assets)
  - Inheritance tax (on inherited income and assets)
  - National insurance taxes (contributions to finance pensions and social security)
Indirect Taxes:
- Incurred on purchased items; producers collect and remit these taxes.
- Examples:
  - Value Added Tax (VAT) (on most goods and services)
  - Excise duties (on specific goods like alcohol)
  - Customs duties (on imports)
Public Sector Receipts (2025-26 Estimates):
- Public sector current receipts are expected to be around $£1,229$ billion.
- Major sources include:
  - Income tax: $£329$ billion
  - VAT: $£214$ billion
  - National Insurance Contributions: $£199$ billion
  - Other taxes: $£128$ billion (includes capital taxes, stamp duties, etc.)
  - Other non-taxes: $£125$ billion (includes interest, dividends, etc.)
  - Corporation tax: $£105$ billion
  - Council tax: $£50$ billion
  - Excise duties: $£46$ billion
  - Business rates: $£34$ billion

Income Tax Bands (UK):
- Personal Allowance: Up to $£12,570$ (0% tax rate)
- Basic Rate: $£12,571$ to $£50,270$ (20% tax rate)
- Higher Rate: $£50,271$ to $£125,140$ (40% tax rate)
- Additional Rate: Over $£125,140$ (45% tax rate)
Taxation Systems:
- Progressive: The average tax rate increases as income increases.
- Regressive: The average tax rate decreases as income increases.
- Proportional: The percentage of income paid in tax remains constant regardless of income.

Types of Benefits:
- These are transfer payments.
- Means-tested benefits
- Universal benefits
- Benefits in kind

Budget Positions:
- Budget Deficit: Government spending is greater than net tax revenue (Tax revenue - Benefit spending).
- Balanced Budget: Government spending equals net tax revenue.
- Budget Surplus: Government spending is less than net tax revenue.