Tuesday, May 15, 2007

Reasons for Government Spending

Explain Reasons for Increasing Government Spending. (10)

1. Improve Public Services

Higher government spending can lead to improved public services like health, education and transport. These are important for increasing the quality of life and economic well being

2. Increase Productive Capacity of Economy.

Some types of government spending, can help to overcome market failure. For example, education can help increase labour productivity and reduce structural unemployment; if the education spending is well targeted it can help to increase the long run trend rate of growth.

However, not all government spending is guaranteed to actually increase government spending, it may be subject to government failure and inefficiency.

3. Expansionary Fiscal Policy

Increased government Spending without higher taxes is likely to increase AD. It will cause a budget deficit, however, the increased Government spending is an injection of spending to the economy and could help to increase the rate of economic growth. Note, some monetarists argue increased government spending will just cause crowding out, and therefore it will not increase AD.

4. Reduce Inequality.

A significant % of government spending is spent on social security. This includes benefits, such as; unemployment benefit, income support, child benefit and housing benefit. The majority of these benefits are means tested; this means they are targeted to those on low incomes. The aim is to reduce relative poverty and inequality

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