Govt Spending

JA Stenning

Government Spending

Govt Spending

JA Stenning

Trends in Govt Spending

• During early 19th Century, Govt spending as a percentage of national income was low (10%).

• Big expansion came during and after WW2.

• 1945 – 1951 saw establishment of the Welfare State and nationalisation of key industries.

Govt Spending

JA Stenning

Determinants of Govt. Spending

1. State of the Economy: In a recession, govt spending will rise as a % of GDP. GDP falls and automatic stabilisers come into play. As tax revenues also fall, there will be a budget deficit.

2. Political Ideology: Left wing governments more likely to favour public spending.

3. Economic Theory: Classical theory advocates a small public sector, low taxes and low borrowing. Free markets seen as a gaurantee of efficiency.

4. Public Opinion: In 1980’s tax cuts were v popular. Media also play an important role.

Govt Spending

JA Stenning

Determinants of Govt. Spending

5. Demographic Changes: E.g. issue of an ageing population.

6. Changing Expectations: E.g. people now expect much more from the NHS.

7. Changing Technology.8. Social Changes.

Govt Spending

JA Stenning

Financing Govt. Spending

• Govt spending is almost matched by tax revenues.• Most years see the government running a budget

deficit.

• Government can borrow in 2 ways:

a. Borrowing from the Bank of England.b. Selling securities (treasury bills or bonds) on the open

market.

Govt Spending

JA Stenning

Factors Affecting Govt Borrowing

• The amount of government spending.• The state of the economy• The amount received in tax• Political interests• Economic theory of the day.

A budget surplus is expansionary because it causes AD to expand.

Govt Spending

JA Stenning

Adverse Effects of Govt. Borrowing

• Increases the national debt. This is one of the biggest areas of govt expenditure.

• Borrowing from the Bank of England increases the money supply which can be inflationary.

• Crowding Out