Government Spending (G)

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

1. Government Spending Lower 6 th Macro Aggregate Demand

2. Intro to Government Spending Government Spending Mr O’Grady

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

4. Determinants of Government Spending Government Spending Mr O’Grady

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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