What Is The Government Spending Money On

What is Government Spending?

Government spending refers to money spent by the public sector on the acquisition of goods and provision of services such as education, healthcare, social protection Social Security Social Security is a US federal government program that provides social insurance and benefits to people with inadequate or no income. The first Social , and defense.

In national income accounting, when the government acquires goods and services for current use to directly satisfy the individual or collective needs and requirements of the community, it is classified as government final consumption spending.
When the government acquires goods and services for future use, it is classified as government investment. This includes public consumption and public investment, and transfer payments consisting of income transfers.

Government Spending

Sources of Government Spending

Government spending is financed primarily through two sources:

1. Tax collections by the government

Direct taxes
Indirect taxes

2. Government borrowing

Borrowing money from its own citizens
Borrowing money from foreigners

Public spending enables governments to produce goods and services or purchase goods and services that are needed to fulfill the government's social and economic objectives Monetary Policy Monetary policy is an economic policy that manages the size and growth rate of the money supply in an economy. It is a powerful tool to . Over the years, we've seen significant changes in the role and size of governments around the world.

Public spending increased remarkably in the 20^th century, when governments all over the world started spending more funds on education, healthcare, and social protection. At present, the governments of developed countries spend more as a percentage of Gross Domestic Product (GDP) Gross Domestic Product (GDP) Gross domestic product (GDP) is a standard measure of a country's economic health and an indicator of its standard of living. Also, GDP can be used to compare the productivity levels between different countries. than the governments of developing countries.

Also, governments around the world rely upon the private sector to produce and manage a country's goods and services and utilize public-private partnerships to finance, design, build, and operate infrastructure projects.

In the 2005-10 period alone, the total value of public-private partnerships, designed to increase the spending on public infrastructure projects in low and middle-income countries, more than doubled.

Purposes of Government Spending

To supply goods and services that are not supplied by the private sector, such as defense, roads, and bridges; merit goods such as hospitals and schools, and welfare payments and benefits including unemployment Structural Unemployment Structural unemployment is a category of unemployment caused by differences between the skills possessed by the unemployed population and the and disability benefits.
To achieve improvements in the supply-side of the macro-economy, such as spending on education and training to improve labor productivity.
To provide subsidies to industries that may need financial support for either their operation or expansion. The private sector is not able to meet such financial requirements and, hence, the public sector plays a crucial part in lending necessary support. For example, transport infrastructure projects do not attract private finance unless the government provides expenditures for the industry.
To help redistribute income and promote social welfare.

Types of Spending

1. Current spending

They are for the short term and include expenditure on wages and raw materials.

2. Capital spending

They are for the long term and do not need to be renewed each year. Also called "social capital," they include spending on physical assets like roads, bridges, hospital buildings, and equipment.

Government Borrowings

The government primarily funds its spending on the economy through tax revenues it earns. However, when revenue is insufficient to pay for expenditures, it resorts to borrowing. Borrowing can be short-term/long-term and involves selling government bonds/bills. Treasury bills are also issued into the money markets to help raise short-term cash.

Additional Resources

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To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

Balance of Payments Balance of Payments The Balance of Payments is a statement that contains the transactions made by residents of a particular country with the rest of the world
Capital Account Capital Account The capital account is used to account for and measure any financial transaction within a country that isn't exerting an active effect on that country's savings, production, or income. The capital account – along with the current and financial accounts – make up the country's balance of payments
Fiscal Policy Fiscal Policy Fiscal Policy refers to the budgetary policy of the government, which involves the government controlling its level of spending and tax rates
Market Economy Market Economy Market economy is defined as a system where the production of goods and services are set according to the changing desires and abilities of