Types of Government Spending - Example

Higher government spending must be good for growth. Introduction: Government’s only aim is to work for social welfare and take care of all the needs and wants of its public (Folster and Henrekson 1520). Government spending is undertaken with an intention that it will boost country’s economic growth. And it does. The higher the Government Spending, the more availability of public goods in the country, proving to be beneficial for the citizens of the country. Public spending is a key factor in the state’s economic growth and development. It is very essential for financing infrastructure electricity, including roads and water but this public spending should be undertaken, after evaluating all the options so that it proves to be advantageous to the growth of the economy. That’s why this issue regarding government spending is important, if it’s not done properly, the country might face a serious financial crisis. Types of Government Spending There are numerous sources that enable the government to undertake such a big task. It has to get sufficient amount of funds to be invested for economy’s growth. Some of the areas for Government Spending can be Transfer Payments, Investment, Subsidies and Grants etc. (Alexiou and Anastasiadis 12) Transfer Payments are those unrequited payments as no such money is asked for as an exchange when this payment is made. After setting social welfare programs, Governments redistribute income among the deserving people, and these transfer payments are used to provide these incomes. Subsidies given by the government body should not be mixed with these specific payments given. With sound stewardship, along with a high degree of accountability, transparency and integrity, these transfer payments are managed by government (Weinbach and Paul 344). There is no doubt that the more the transfer payments, the better it is for the growth of the economy as this practice of redistribution of income, people’s net income increase, and this leads to a greater purchasing power. As now they are able to purchase more of their commodities, this means aggregate demand will be proliferated resulting in a higher production in the economy. To undertake this production activity, more people will get employed and thus employment will decrease the poverty prevailing in the society and benefitting the growth of the economy (Alexiou 16). Another source for government/public spending is ‘Subsidies and Grants’. Government take out a certain proportion from the capital reserves (money collected from taxes or other financial sources) they already have and then spend a certain amount of this money for the welfare and betterment of the society. Usually, these subsidies and grants are used to industrialize a state and encourage business owners to continue their business and economic activities (Nijkamp and Poot 124). Another source for Government spending can be ‘investment’. Investment is the foundation of Economic Growth and increases standard of living in the long run. Investments in human capital, education, labor skills and training, investment in physical capital, infrastructure and lastly investment in innovation, these all types of investments enables the economy to increase its growth and use its resources in the best possible way. Many of the high-income countries exist due to the presence of infrastructure in the country and this is mainly due to the investment that takes place (Wahab 135) Potential Benefits Governments make use of numerous grants and subsidies to support employment in the country, either by subsidizing private companies or by providing employment guarantees to the workers. Government procurement has been extensively used from past many years to require ‘fair wages’ from private contractors. In addition to this, government spending on social security benefits produces extra demand, because it gives greater purchasing and spending power to the citizens who would otherwise have very low real incomes and thus, this extra spending power means extra demand and extra jobs in the country, leading to greater good for its economic growth. Public Investment has also resulted in poverty reduction. With the help of educational investment in the country, the literacy rate of the country rises. With the help of education, people get trained and skilled, they become more productive. They can now easily get jobs and earn fair wages which will automatically eradicate poverty levels in the country. This poverty reduction and a well-educated nation can work more effectively, leading to economic growth. Investment in infrastructure always gives rise to tourism industry. More people from foreign countries will visit your country, leading to more foreign reserves and better international relations. But before starting any project and public/private investment takes place, a cost benefit analysis is evaluated and then this project is undertaken. A rise in public investment in the country has to be assessed before, on a country-by-country basis, according to the economy’s structure and its initial physical capital stock. Short term benefits can be employment, increased productive efficiency, and increased exports where as long term benefits can be those benefits gained from the training provided to the workers of these industries (Nasiru 723). There are many factors that convinces us how government spending actually stimulates economy. There has been many cases such as in U.K, when its government officials decided to undertake a project for the economic growth and how its results turned out to be great. Public spending in economy’s infrastructure stimulated the economy at its best. Providing electricity in the rural areas such as Wychavon enabled its people to have a better life. Such areas began to industrialize and the unemployment rate there dropped drastically. A better transport facility was being provided by the government which increased occupational immobility. A better road network improved trading of goods within the country and also with the neighboring countries. Economic growth is stimulated only when there is an aggregate demand or an aggregate supply in the economy. For example, aggregate demand occurs when an increase in people’s purchasing power is identified. With more spending power, people will tend to demand more for commodities and services. And in case of aggregate supply, it happens, for example, when technological improvements occur, industries become more productive and there is an aggregated supply in the market. In case of U.K, back in 2003, it decided to spend in order to boost industrial growth, thus leading to a stimulation in its economic growth. They started to spend on research and development programs, discovered about new production techniques in order to obtain a more efficient and productive results. And this happened, when the output obtained was way more than the previous year’s output. So, government spending can stimulate economic growth if government makes its one dominant sector strong, focuses on it, go for certain improvements and in the end get remarkable results. Possible Problems Excessive government spending will result in government facing problem in paying off their debts. This may result in deficit in the balance of payment which leaves a very negative impact on the economic growth of an economy both in short term and long term or a budget deficit when the government is short of funds to offer their payments. Deficit may lead to a serious financial crisis for the economy. The citizens of U.K actually blamed government spending to result in deficit, when in 2010, due to this financial crisis, the problem of bankrupting became evitable. U.K’s government had started to spent beyond its means which lead to deficit and to counter deficit is to cut down public spending. Every U.K citizen had this view. Problem faced due to spending and creating deficit in the country, which happened in U.K, is crowding out. the interest rates increased leading to a decline in investment spending. Increased spending, effects the private borrowing too. It crowd outs this borrowing. Too much borrowing took place and in the end, Central bank had less amount of money to pay back government’s debts and this in all results in Deficit. If this is substantial, then they may create problems in gaining benefits of fiscal policies in the country, therefore, affecting the economy as a whole, leaving long term effects on the U.K’s economic growth (Alexiou and Anastasiadis 12). In the international market, the value of the U.K’s currency started to fall in the year 2007. For the U.K’s economy, as its currency’s value fell, it had to to give more amounts of its funds to pay off their foreign debts. This automatically resulted in deficit felt by the economy as government had to give a greater proportion of its funds to pay off all the money it owes. The long term problem which will be faced will be the devaluation of currency of other countries who engage in a business activity with the U.K, especially Germany. Conclusion: The above discussion could be sum up with the conclusion that Government should not go for excessive transfer payments, investment and abundant funds as this will result in inflation and deficit in Balance of Payments, especially U.K government, which is experiencing Euro Zone Crisis as well. U.K Government should focus on areas in which it can gain maximum economic growth and then it should commence its public spending programs to achieve a greater good for the growth of the economy. Whereas some blunders are made due to this spending and they cause a great trouble, like excessive government spending will certainly result in a serious deficit in the economy. With sufficient amount gained through respective sources, government spending can strengthen the foundation of an economy over a short time period and this can last for years with the help of their long-term benefits (Alexiou and Anastasiadis 12). References Constantinos Alexiou. "Government Spending and Economic Growth: Econometric Evidence from the South Eastern Europe (SEE)". Journal of Economic and Social Research 11(1) 2009, 1-16 Constantinos Alexiou and G. Anastasiadis. “FDI and Financial Restructuring in the SEE.” Working Paper, South Eastern European Research Centre, (SEERC), University of Sheffield, 2008, Print. Daneit Mitchell. "The impact of government spending on economic growth". Backgrounder, The heritage Foundation, 2005. Print. Folster, S. and M. Henrekson. “Growth Effects of Government Expenditure and Taxation in Rich Countries.” European Economic Review 2010, 45(8): 1501–1520. Henrika Sakiene. "Governmental Transfer Payments For Individuals: Ground and After-Effect Analysis", ECONOMICS & MANAGEMENT: 2009. 14: pp927-933 Inuwa Nasiru. Government Expenditure and Economic Growth in Nigeria: Cointegration Analysis and Causality Testing. Academic Research International, 2012, Vol. 2, No. 3, p718-723 Nijkamp, P., and J. Poot, "Meta-analysis of the effect of fiscal policy on long-run growth", European Journal of European Economy, 2004. 20, 91, 124. Persson, T., and G. Tabellini, "Comparative politics and public finance", Journal of Political Economy, 2008, 108, 1121–1161. Wahab, M. "Economic growth and government expenditure: evidence from a new test specification", Applied Economics, 2004, 36, 2125-2135. Weinbach A. P., Paul R. J. "Running the Numbers on Lotteries and the Poor: An Empirical Analysis of Transfer Payment Distribution and Subsequent Lottery Sales". Atlantic Economics Journal, 2008 36:333–344 Read More