Government Expenditure

Government Expenditure

Government spending is more stable and predictable than other types of spending. This is because a large part of it is determined by demographic factors. The NHS, education and pensions all have to be funded from year to year and spending on these politically sensitive areas cannot be easily cut by more than small amounts. On the other hand, big increases may be equally controversial as they may be accompanied by higher taxes or more borrowing. Nonetheless, the government does have an important role in influencing the level of aggregate demand.

__Fiscal policy __refers to the decisions the government makes on tax rates and spending. Some of these decisions may be targeted at particular groups, regions or industries. A new motorway, for instance may boost a region’s economy. Reducing stamp duty may stimulate the housing market.

Government Expenditure, figure 1

The main fiscal decisions are made annually in the Budget __in the autumn.__

Active fiscal policy involves the government changing tax rates or spending to influence the overall level of aggregate demand, the rate of inflation, unemployment or the balance of payments. In a recession, the government may choose to deliberately run a budget deficit_, _which means that government spending is greater than tax receipts, and therefore leads to more government borrowing. If the economy is overheating, the government may choose to run a budget surplus,