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 payment spending
- 5 Government spending per country
- 6 References
- 7 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.
Transfer payment spending
Government expenditures that are not acquisition of goods and services, and which 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, transfers are made without an exchange of goods or services. Examples of certain transfer payments include welfare (financial aid), social security, and government giving subsidies to certain businesses (firms).
Government spending per country
In 2010 national governments spent an average of $2,376 per person, while the average for the world's 20 largest economies (in terms of GDP) was $16,110 per person. Norway and Sweden expended the most at $40,908 and $26,760 per capita respectively. The federal government of the United States spent $11,041 per person. Other large economy country spending figures include South Korea ($4,557), Brazil ($2,813), Russia ($2,458), China ($1,010), and India ($226). The figures below of 42% of GDP spending and a GDP per capita of $54,629 for the U.S. indicate a total per person spending including national, state, and local governments was $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.
Public social spending comprises cash benefits, direct in-kind provision of goods and services, and tax breaks with social purposes provided by general government (that is central, state, and local governments, including social security funds).
|Country||Public social spending
% of GDP
- 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. Archived from the original (PDF) on 3 May 2012. 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 (1): 20. doi:10.1186/1472-6963-5-20. PMC . PMID 15755330.
- Bishop, Matthew (2012). "Economics AZ– 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. Note: these numbers do not include U.S. state and local government spending which when included bring the per capita spending to $16,755
- 2014 Index of Economic Freedom
- "Social spending Public, % of GDP, 2015". OECD. OECD data
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