2.2.4: Government Expenditure (G)

This Edexcel study note covers government spending.

Key Influences on Government Expenditure

Trade Cycle

• Definition: The trade cycle, or business cycle, refers to the fluctuations in economic activity that an economy experiences over a period, typically measured by changes in GDP and other economic indicators.
• Phases:
  • Expansion: Rising economic activity, employment, and income levels. Governments might reduce spending due to increased tax revenues and lower unemployment benefits.
  • Peak: Economic activity is at its highest. Government expenditure may stabilize as revenues peak.
  • Contraction: Decreasing economic activity, falling employment, and income levels. Government spending often increases to stimulate the economy through programs like unemployment benefits and public works.
  • Trough: Economic activity is at its lowest. Government spending is typically high to counteract the recession.

Fiscal Policy Decisions

• Definition: Fiscal policy involves government decisions about spending and taxation to influence the economy.
• Components:
  • Government Spending: Includes expenditure on goods and services, infrastructure, education, and defense. Example: The U.S. government’s increased spending on infrastructure projects during economic downturns.
  • Taxation: Adjusting tax rates to control economic activity. Lower taxes can stimulate growth, while higher taxes can cool an overheated economy. Example: The 2017 Tax Cuts and Jobs Act in the U.S. aimed to stimulate economic growth.
• Types:
  • Expansionary Fiscal Policy: Used during recessions to boost economic activity through increased spending and tax cuts. Example: The American Recovery and Reinvestment Act of 2009.
  • Contractionary Fiscal Policy: Used during booms to cool down the economy by reducing spending and increasing taxes. Example: Budget surpluses and reduced public spending in the late 1990s in the U.S.

Other Influences

• Political Factors: Government priorities, party policies, and political stability can significantly impact spending decisions.
• Social Needs: Demographic changes, such as aging populations, can increase expenditure on healthcare and pensions. Example: Japan's rising healthcare costs due to its aging population.
• Economic Conditions: Inflation rates, unemployment levels, and economic growth can affect government spending. Example: Increased unemployment benefits during high unemployment periods.
• Debt Levels: High public debt can constrain government expenditure due to the need for debt servicing. Example: Greece’s austerity measures post-2008 financial crisis.
• External Factors: International events, trade relations, and global economic conditions. Example: Increased defense spending during geopolitical tensions.

Key Economists and Their Contributions

• John Maynard Keynes: Advocated for increased government expenditure and lower taxes during recessions to stimulate demand (Keynesian Economics).
• Milton Friedman: Criticized Keynesian policies, emphasizing the role of monetary policy over fiscal policy in managing economic cycles (Monetarism).

Glossary

• Trade Cycle: Fluctuations in economic activity over time, marked by phases of expansion and contraction.
• Fiscal Policy: Government strategies involving taxation and spending to influence the economy.
• Expansionary Fiscal Policy: Policies designed to stimulate economic activity, typically through increased spending and tax cuts.
• Contractionary Fiscal Policy: Policies aimed at reducing economic activity, often through decreased spending and higher taxes.
• Public Debt: The total amount of money that a government owes to creditors.
• Monetary Policy: Central bank actions involving the money supply and interest rates to influence the economy.

Essay-Style Questions

1. Discuss the impact of the trade cycle on government expenditure, providing real-world examples to illustrate your points.
2. Analyze the role of fiscal policy decisions in managing economic stability. How effective are these policies in practice?
3. Evaluate the influence of political factors and social needs on government spending priorities. Use case studies to support your analysis.
4. Compare and contrast the contributions of John Maynard Keynes and Milton Friedman to our understanding of government expenditure and fiscal policy.
5. How do external factors, such as international trade relations and global economic conditions, affect government expenditure decisions?

These notes aim to provide a comprehensive understanding of the main influences on government expenditure, incorporating key theoretical perspectives and real-world applications.