Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting the acquisition by governments of goods and services for current use, to directly satisfy the individual or collective needs of the community, is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment (government gross capital formation). These two types of government spending, on final consumption and on gross capital formation, together constitute one of the major components of gross domestic product.
Government spending can be financed by government borrowing, seigniorage, or taxes. Changes in government spending is a major component of fiscal policy used to stabilize the macroeconomic business cycle.
- 1 Macroeconomic fiscal policy
- 2 Current use: final consumption expenditure
- 3 Infrastructure and investment: gross fixed capital formation
- 4 Transfer payments
- 5 International government spending
- 6 See also
- 7 References
- 8 External links
Macroeconomic fiscal policy
For fiscal policy, increases in government spending are expansionary, while decreases are contractionary. John Maynard Keynes was one of the first economists to advocate government deficit spending (increased government spending financed by borrowing) as part of the fiscal policy response to an economic contraction. According to Keynesian economics, increased government spending raises aggregate demand and increases consumption, which leads to increased production and faster recovery from recessions. Classical economists, on the other hand, believe that increased government spending exacerbates an economic contraction by shifting resources from the private sector, which they consider productive, to the public sector, which they consider unproductive.
Current use: final consumption expenditure
Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is called government final consumption expenditure (GFCE.) It is a purchase from the national accounts "use of income account" for goods and services directly satisfying of individual needs (individual consumption) or collective needs of members of the community (collective consumption). GFCE consists of the value of the goods and services produced by the government itself other than own-account capital formation and sales and of purchases by the government of goods and services produced by market producers that are supplied to households - without any transformation – as "social transfers" in kind.
Infrastructure and investment: gross fixed capital formation
Government acquisition intended to create future benefits, such as infrastructure investment or research spending, is called gross fixed capital formation, or government investment, which usually is the largest part of the government. Acquisition of goods and services is made through production by the government (using the government's labour force, fixed assets and purchased goods and services for intermediate consumption) or through purchases of goods and services from market producers. In economic theory or in macroeconomics, investment is the amount purchased per unit of time of goods which are not consumed but are to be used for future production (i.e. capital). Examples include railroad or factory construction.
Spending on physical infrastructure in the U.S. returns an average of about $1.92 for each $1.00 spent on nonresidential construction because it is almost always less expensive to maintain than repair or replace once it has become unusable.
Likewise, government spending on social infrastructure, such as preventative health care, can save several hundreds of billions of dollars per year in the U.S., because for example cancer patients are more likely to be diagnosed at Stage I where curative treatment is typically a few outpatient visits, instead of at Stage III or later in an emergency room where treatment can involve years of hospitalization and is often terminal.
Government expenditures that are not acquisition of goods and services, and instead just represent transfers of money, such as social security payments, are called transfer payments. These payments are considered to be exhaustive[jargon] because they do not directly absorb resources or create output. In other words, the transfer is made without any exchange of goods or services. Examples of certain transfer payments include welfare (financial aid), social security, and government giving subsidies to certain businesses (firms).
International government spending
In 2010 the average national government spent $2,376 per citizen, while the average for the world's 20 largest economies (in terms of GDP) was $16,110 per citizen. Norway and Sweden topped the list with per citizen spending of $40,908 and $26,760 respectively. The federal government of the USA spent an average of $11,041 per citizen (per capita), ahead of only South Korea ($4,557), Brazil ($2,813), Russia ($2,458), China ($1,010), and India ($226) in the twenty largest world economies. The figures below, indicate 41.6% of GDP spending and a GDP per capita of $54,629, which suggests and total per person government spending of $22,726 in the U.S.
As a percentage of GDP
This is a list of countries by government spending as a percentage of gross domestic product (GDP) for the listed countries, according to the 2014 Index of Economic Freedom by The Heritage Foundation and The Wall Street Journal. Tax revenue is included for comparison.
|Country||Tax burden % GDP||Govt. expend. % GDP|
|Bosnia and Herzegovina||38.9||49.2|
|Central African Republic||9.4||15.7|
|Democratic Republic of the Congo||23.6||29.1|
|Papua New Guinea||25.8||28.6|
|Saint Vincent and the Grenadines||22.1||30.3|
|São Tomé and Príncipe||16.8||49.0|
|Trinidad and Tobago||16.5||35.4|
|United Arab Emirates||6.1||23.7|
Government spending in the United States of America occurs at several levels of government, including primarily federal, state, and local governments. The Organisation for Economic Co-operation and Development (OECD) reports that total federal, state and local spending in the United States was $6.134 trillion in 2010. This is tracked in National Income and Product Accounts.
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As of September 2001[update] the U.S. Congressional Budget Office reported that federal government spending for 2004 was projected to be $2.293 trillion, or slightly less than 20% of the GDP. Of that, $646.7 billion was for net interest, $486 billion for defense, $492 billion for Social Security, $473 billion for Medicare and Medicaid, $191 billion for various welfare programs, $136 billion for "retirement and disability" benefits, and $64 billion was projected to be spent elsewhere.
There are two types of government spending – discretionary and mandatory. Discretionary spending, which accounts for roughly one-third of all Federal spending, includes money for things like the Army, FBI, the Coast Guard, and highway projects. Congress explicitly determines how much to spend on these programs on an annual basis in annual appropriations bills.
Mandatory spending accounts for two-thirds of all federal spending. This kind of spending is authorized by permanent laws, and includes insurance programs like Social Security, Medicare/Medicaid, the Supplemental Nutrition Assistance Program, and federal retirement and disability programs that provide benefits to federal civilian employees, members of the military, and veterans. Spending levels in these areas are mostly determined by the number of people who request and qualify for the program benefits as determined by the agencies. In some cases, mandatory spending is influenced by earmarks in multi-year spending bills like highway bills and farm bills.
All government agencies face congressional oversight and most programs are updated and amended by congressional legislation, as well as internal agency rules and regulations. U.S. Congress members who seek to influence agencies with direct control have at times been prosecuted or disciplined by the respective House and Senate Ethics Committees.
State and local spending
The United States Census Bureau publishes historical data on government spending in the United States in its Statistical Abstract of the United States and in its special release of historical statistics in 1976 at the time of the US Bicentennial.
Over the last century, overall government spending in the United States has increased substantially from about seven percent of GDP in 1902 to about 35 percent of GDP in 2010. Major spikes in spending occurred in World War I and World War II.
When broken down by major function, the history of US government spending as a percent of GDP shows a slow and consistent increase in education spending; it shows the spikes in defense spending during World War I and World War II, and the sustained high level maintained during the Cold War. Spending on welfare shows a clear takeoff during the Great Depression and a modest decline following reform in 1996. Spending on pensions (primarily Social Security) begins to show up in the 1950s. Health care spending takes off after the birth of Medicare and Medicaid in the 1960s and shows sustained growth ever since. By 1990, the United States was spending 2 per cent of its budget on education, as against 30 per cent on the elderly.[unreliable source?]
- Rahn curve
- Government operations
- Public expenditure
- Public finance
- Government budget
- Government waste
- Fiscal policy
- Mandatory spending
- Taxpayers unions
- "Frequently Asked Questions: BEA seems to have several different measures of government spending. What are they for and what do they measure?". Bureau of Economic Analysis. 28 May 2010. Retrieved 12 July 2014.
- Robert Barro and Vittorio Grilli (1994), European Macroeconomics, Ch. 15–16. Macmillan, ISBN 0-333-57764-7.
- F. Lequiller, D. Blades: Understanding National Accounts, Paris: OECD 2006, pp. 127–30
- "Gross capital formation" Statistics Explained European Union Statistics Directorate, European Commission
- Cohen, Isabelle; Freiling, Thomas; Robinson, Eric (January 2012). The Economic Impact and Financing of Infrastructure Spending (PDF) (report). Williamsburg, Virginia: Thomas Jefferson Program in Public Policy, College of William & Mary. p. 5. Retrieved 1 October 2012.
- Hogg, W.; Baskerville, N.; Lemelin, J. (2005). "Cost savings associated with improving appropriate and reducing inappropriate preventive care: Cost-consequences analysis" (PDF). BMC Health Services Research. 5: 20. doi:10.1186/1472-6963-5-20. PMC . PMID 15755330.
- Bishop, Matthew (2012). "Economics A-Z terms beginning with T;transfer". The Economist. Retrieved 11 July 2012.
Payments that are made without any good or service being received in return. Much PUBLIC SPENDING goes on transfers, such as pensions and WELFARE benefits. Private-sector transfers include charitable donations and prizes to lottery winners.
- CIA World Factbook, population data from 2010, Spending and GDP data from 2011. These numbers fail however to account for U.S. State and Local Government Spending which when included bring the per Capital Spending to $16,755
- 2014 Index of Economic Freedom
- "11. Government expenditure by function (COFOG)". OECD.Stats. Retrieved 18 April 2012.
- Federal Budget Spending and the National Debt
- Statistical Abstract of the United States
- Bicentennial Edition: Historical Statistics of the United States, Colonial Times to 1970, Part 2 Archived 18 January 2005 at the Wayback Machine.
- "U.S. spending". Rolling Stone. April 19, 1990. p. 43.
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