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Government expenditure (G)

a) Influences on government expenditure

Government expenditure is spending by the government on goods and services (in the interest of maximising social welfare) over a period of time and at a given price level (KEY DEFINITION). The government plays a key role in the economy through the provision of defence, education, roads, streetlights, etc. However, which goods are provided vary from country to country depending on the type of economy (1.1.6). In the US, healthcare is a private industry, whereas in the UK we have the NHS. In countries like China, houses are allocated rather than purchased, but in most free market economies there are private housing markets. In every country no matter the economic system used, defence is provided through government expenditure. In 1943 during World War II, government spending was 62.2% of UK GDP (defence costs).

The main influences on government expenditure are as follows:

Fiscal policy - Fiscal policy is all about the governments decisions on spending and taxes, and it depends on their objectives. In the UK, the Labour party typically spends more than the Conservatives do when in government. Labour focuses much more on improving public services, so is more likely to raise taxes to increase the government budget.

Age of the population - An older population leads to higher spending on state pensions and healthcare. For example, Japan's pension fund assets make up 30.1% of their GDP. Conversely, a younger population increases spending on education. However, as younger people are more economically active, the government will receive higher revenues through income tax.

The trade cycle - The level of government spending is influenced by the state of the economy. For example, in a recession government expenditure automatically rises, as higher unemployment increases welfare benefits (however in countries like China with little to no welfare payment system, this is not the case). Also, the government may increase spending in a recession in order to stimulate AD, growing the economy. In a boom, the government may reduce spending in order to conserve funds or pay off debts, and less spending decreases demand in the economy as well as reducing the risk of demand-pull inflation.

Use the word FAT as a mnemonic device for remembering the factors which influence government expenditure!

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