GOVERNMENT SPENDING

Public Expenditure

Structure of Public Expenditure

Public expenditure is spending by central government, local government, and nationalised industries. For every pound of public spending in 1996:

• Central government spends 74p

• Local authorities spend 25p

• Public Corporations spend 1p

Table 14.1 The main government spending departments

Name of department	Responsibility
Social Security	Pensions & welfare benefits
Health	National Health Service
Defence	Navy, Army and Air Force
Education and Science	Schools; universities; the arts
Environment	Roads; housing; local authorities
Home Office	Courts; police; prisons; fire service
Employment	Training schemes; job centres
Agriculture, Fisheries and Food	Agricultural policy
Trade and Industry	Regional and Industrial policy
Foreign Office	Embassies
Energy	Electricity; gas; oil; atomic energy

Public and Merit Goods

A public good is an item which cannot be withheld from one consumer without withholding the good from all customers. Non payers cannot be excluded. Since public goods, such as street lighting, can be used free of charge, they will not be supplied by private-sector firms. Public goods are therefore supplied by central and local government.

A merit good is a useful item, such as education, which some people are unwilling to buy. Merit goods are supplied by the public authorities either free or for a minimal charge so as to enlarge consumption.

Aims of Government Spending

• To provide public goods and services.

• To encourage the consumption of merit goods.

• To relieve poverty.

• To influence the level of total demand in the economy.

Macroeconomics

Macroeconomic Problems

Macroeconomics is concerned with the study of the whole economy. Problems arise when the economy suffers from high unemployment, inflation, or a balance of payments deficit. Therefore the government sets itself certain macroeconomic objectives:

• Low unemployment

• Low inflation

• A balance of payments surplus

• Economic growth

Booms in the Economy

A boom is when output and employment in the economy are rising. This is the peak of the trade cycle.

However:

• A boom increases spending on imports, causing balance of payments problems.

• Once high levels of employment have been reached, output cannot be increased any further and the boom causes inflation.

Slumps in the Economy

A slump is when output and employment in the economy are falling. This is the bottom of the trade cycle. However:

• A slump reduces spending on imports, thus improving the balance of payments.

• Reduced total spending lowers inflationary pressure.

Trade Cycles

The trade or business cycle refers to regular movements in the economy between booms and slumps.

Government Macroeconomic Policies

Table 14.2 shows some of the policies the government can use to try to get full employment, stable prices etc.

Table 14.2 Macroeconomic policies

Policy	Description
Fiscal	Changes in government expenditure and taxation
Monetary	Changes in the money supply and interest rates
Prices and incomes	Legal or voluntary limits on price and wage increases
Regional	Measures to help depressed areas
Industrial	Government planning of industry
Commercial	Quotas, tariffs, exchange controls or free trade
Exchange rate	Encouraging a depreciation or appreciation of sterling

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