Government spending and fiscal policy

Table of Contents

Introduction. 1

Government spending and fiscal policy. 1

2.1.    Overview of Government spending and fiscal policy. 1

2.2.    The effects of Government spending and fiscal policy. 3

Conclusion. 6

Reference. 7

 Introduction

Fiscal policy is one of the elements of the important policy system in regulating the macro economy (Cottier, Lastra, Tietje and Satragno, 2014). In particular, fiscal policy includes the government activities impacting on the development of the economy through changes in government spending and taxation. Fiscal policy is different from the basic economic policies such as monetary policy. It is a policy that is responsible for stabilizing the economy by controlling interest rates and money supply. The two main tools of fiscal policy are government spending and taxation (Jain & Khanna, 2007). The changes in the level and composition of taxation and government spending may affect the economic variables, such as aggregate demand and the level of economic activity; type of resource allocation; distribution of income. In other words, fiscal policy relates to the overall impact of the government budget for economic activities. Therefore, we can see that, government spending and fiscal policy affect directly the economy, and especially, the infrastructure of a country.

 Government spending and fiscal policy

 Overview of Government spending and fiscal policy

According to Dwivedi (2005), Government spending or public investment is expenditures of the government to provide public goods and services, such as the cost for development of roads, schools, military, wages of public servants, etc… Government spending is an important component of aggregate demand. Keynesian economics confirms that public investment can promote aggregate demand through the fiscal multiplier. Based on that, the authors enhance the role of fiscal policy (Keynes, 1936).

Having the same opinion, Müller, Meier, and Corsetti (2012) state that Government spending includes many items with different functions such as public spending of the government on the provision of non-market goods and services; the expenditure for the production of government in the provision of market goods and services (when the state-owned enterprises are directly involved in the production and trading of goods on the market); and the investment expenditures reflecting public investment in capital formation for long-term benefits, such as infrastructure, roads, schools, hospitals,… In essence, government spending for the provision of non-market goods and services are free provision or at prices that are much lower than the cost of production. The free basic services provided by the government to society can be listed as national security, law enforcement, public health, primary education, basic scientific research, infrastructure, or market support services. The value of non-market goods and services provided by the government are calculated by the spending method which the government must spend money or tax revenue on producing and delivering these goods and services for the people (Brixi & Swift, 2004).