Macroeconomics: AQA Unit 4 June 10 Essay 3

11) Explain the possible economic reasons for the level and distribution of government expenditure (15 marks) 

Government expenditure is just basically the spending by the public sector so the government itself to help and improve the economy. This could be in for many reasons but there are some periods where there is high spending and low spending. One of the main reasons of this is probably due to cyclical movements which can be shown by the diagram below. 

Whereas when there is a boom the government will tend to lower than their expenditure this is called contractionary fiscal policy otherwise there could be a risk that the economy may be over capacity and cause a persistent rise in prices i.e. inflation. However when there is a slump or after two successive quarters a recession the government may want to increase their spending in order to help boost the economy again. For example spending on infrastructure in order to create jobs. However there could be other factors which may affect the level for example the government would want to put some money towards some long term measures such a supply side policies whereas spending goes towards education and training. There could be a high level of structural unemployment so therefore it is needed. Plus Government may cut down spending on welfare benefits in order to create incentives for people to work to people who are claiming benefits and have no intention to find a job. Additionally the government may want to increase spending in merit goods- goods that bring positive spillovers to the economy. This would include more money for better medical treatment for the NHS. 

The distribution of spending might differ over time and there are many reasons for this. One of them is an ageing population where the proportion of older people exceed the younger people and this would mean more pensions would need to be distributed. This could mean higher taxes but it could also force the government to reduce spending in some areas and put to others. For example less on infrastructure and more on pensions. The government may have to redistribute its spending on the current economy situation aswell as in a period of no growth but slump, the government may need to spend more on to helping domestic firms survive. Therefore would be spending less on areas like defence to do so.  As governments spend more they could accumulate debt from borrowing from different countries and would have to pay interest back. The government may have had to spend less on the improvement of the economy in order to pay the debt back.

 

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