Tuesday, June 5, 2007

Effect of Increased Government Spending

in 200/01 the UK's public expenditure was 37% of gdp this forecast to increase to over 42% of gdp by 07/08 examine the likely economic implications apart from increased tax of this trend.

Effect on AD
  • If govt spends more by borrowing some of the increased spending, higher Government spending should increase AD, (G is a component of AD.) - see: Government borrowing
  • However, if tax increases at same rate then net effect on AD is likely to be neutral
  • It depends whether government finances by borrowing or by tax
  • Also, if higher spending is financed by borrowing it may cause crowding out
Effect on AS
  • Higher government spending may increase productive capacity in the long run. For example, they may spend it on education and training e.t.c.
  • However, if it is spent on paying for pensions e.t.c there will be no increase in productive capacity
  • However, there is no guarantee that government spending will actually increase educational standards, there may be government failure
  • Again, it depends what the government is spending its money on.
Efficiency Government vs Private Sector

How efficient is government spending compared to private sector spending. Higher government spending means a declining share of private sector spending and investment. Many economists argue government spending is more inefficient. THerefore, in the long run it can reduce productivity of the economy

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