Government Spending content slideshow. Designed for the Economic A level qualification. Can be used in revision and in class.
Subtopics
Intro to Government Spending
Determinants of Government Spending
3. Intro to Government Spending
Definition: Spending by the government (G) for the benefit of the country’s
citizens, funded by tax revenue (T) and borrowing
G and T will vary according to the government’s reading of economic conditions and the
varying priorities of the government of the day
Stat: Government expenditure made up 18% of UK GDP in 2018
Fiscal Policy: A government's policy regarding taxation and public spending to
achieve macroeconomic objectives through shifting AD
Loose FP: Increased spending and lower tax revenue to boost economic activity
Tight FP: Cutting spending and raising extra tax revenue, resulting in a slower-growing
economy
Why do governments spend money?
Governments spend money to achieve macroeconomic objectives, most importantly
economic growth.
They also spend money to improve the welfare of their citizens, through boosting living
standards and correcting market failure.
In a mixed economy the government has a directive to intervene in markets
5. Determinants of Government Spending
The Health of the Economy: The largest determinant of Government Spending is
how well the economy is performing against the macroeconomic objectives.
Fiscal Policy (changes to G and T) is a powerful tool for governments to influence their
economic performance
Automatic stabilisers: Fiscal policy designed to offset fluctuations in a nation's economic
activity automatically, without any additional, timely authorization by the government
In Recessions: Government will increase automatically as the government pay out more in
transfer payments such as benefits, and receives less in tax revenue as average incomes fall
This will cause an increase in AD, promoting economic growth
In Booms: Economic growth is positive. Government spending automatically falls as fewer
transfer payments are required, similarly tax revenue rises as incomes increase.
This will act to slow AD growth, preventing too much inflation
Discretionary Fiscal Policy: Government made, as opposed to automatic, changes
to G and T to achieve macroeconomic objectives
Intentional changes to rates of different taxes and the level of different spending, often linked
to the policies of the current government or shocks to the economy
6. Different Govs: In the UK different governments tend to pursue different goals and
therefore have different discretionary fiscal policy
Conservatives: tend to spend relatively low amounts to improve the government's budget
balance and allow the free market to allocate resources
Labour: tend to spend relatively high amounts in order to redistribute income and correct
market failures for the benefit of its citizens
However: Often the government of the day’s policies are at odds with
automatic stabilisers, dampening their effectiveness
Conservatives tend to be voted in when the economy is doing badly, but their
contractionary policies tend to slow the rate of growth, impeding recovery
Labour tend to be voted in when the economy is doing well, but their expansionary
policies sometimes lead to unsustainable levels of growth, worsening economic instability
Shocks: Shocks to the economy can warrant a government to increase spending,
and cut taxes, to protect citizen’s standards of living and give the economy a boost
Coronavirus: In 2020, G jumped up to protect jobs through the furlough scheme and
subsidies to consumptions through schemes like ‘Eat out to help out’
Great Financial Crisis: Following a collapse in confidence in the banking sector, the
government had to bail out the banks to ensure they had enough cash so people
could withdraw their money and not collapse, bringing down the whole economic system.
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