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What determines government spending In pairs, why might government spending in a country be high or low?

Why spending is high or low Ability to raise tax revenues or to borrow in order to pay for public services In general, tax revenues are lower for developing countries. Why? – Actual taxes are lower because of lower incomes, which means actual government spending is also low – Taxes as a percentage are also low because of: Key reason is low capacity to raise tax, principally because low household incomes means households cannot afford to pay tax, whether direct or indirect. No scope for other taxes like council tax, stamp duty (on share trading or purchase of housing), inheritance etc etc The hidden/subsistence economy means incomes are hidden, and there may be non-compliance as well

Developed countries Choice of electorate – US believe individuals should look after themselves. Tax rates should be low, and the government’s involvement in the economy should be limited – It appears this is not the choice in general of countries in the Euro area, and Nordic countries too (though this may be changing a little) – In the UK, the Conservatives essentially believe individuals and families should bear the responsibility for themselves, but with a safety net (welfare) and an NHS (unlike the US). The Labour Party believes in a more active role for the state, and believes support for low income households should be greater

Matching exercise IMF database

Size of Government –developed countries CountryGov’t spending % GDP 2014 Finland58.3 France57.5 Denmark56.9 Italy51.1 Sweden50.4 Greece49.3 Portugal49.0 Netherlands46.1 Germany44.3 Spain43.6 United Kingdom41.4 Japan40.3 Canada39.4 Ireland38.3 Australia37.0 United States35.7 Switzerland31.4 Korea20.0 Singapore18.2 Average40.3

Other reasons spending is high or low at a given time Fiscal policy – Automatic stabilisers act to increase government spending as % of GDP in recessions (and taxes are lower as % of GDP) – Government active fiscal policy will also influence spending as % GDP – At present, most developed countries are reducing spending as % of GDP because of large deficits Societal changes – May put pressure on spending, eg from ageing population

Government spending - developed 3 main items of spending undertaken by governments: 1.Current spending, to provide goods/services for the population a.Spending on public goods like defence or legislature This is to provide goods/services that the market would not provide b)Spending on merit goods like health, education and transport These goods could be provided by markets, and in some countries are (no NHS in the US). In the UK we believe these services would be under-provided by the market, and that they should be available to all at no cost (though funded by tax payers) 2.Transfers (not part of G in aggregate demand) – Take money from some members of society in tax, to help others who are disadvantaged, eg unemployed, sick/disabled, and also to pay pensions 3.Government investment – Spending on goods which will support future consumption. Basically means infrastructure

UK government spending £billionSpending% GDPSpending% GDPNote Health Care1177.8%1347.4%Merit good Education885.9%844.6%Merit good Transport231.5%191.1%Merit good Total merit goods % % Defence432.9%452.5%Public good Protection342.3%301.7%Public good Total public goods775.1%754.1% Pensions1167.7%1508.3%Transfer Welfare1117.4%1116.1%Transfer Total transfers % % Interest312.1%462.5%Ouch General Government161.1%140.8%Various Other Spending946.3%1136.3%Various Total Spending % % GDP1,5001,808 Source: ukpublicspending.co.uk These numbers include capital spending of about £73 billion in 2015/16

Research project – 3 groups Investigate and produce a summary report showing for chosen country – eg Malaysia, Kenya, South Korea: Tax revenues as % GDP for the last year Government spending as % GDP for the last year and an idea of how this has changed over time A breakdown of government spending into main categories, including where possible – Capital investment – Defence spending – Welfare – Health – Education

Output gap

Planned spending UK

Impact of Autumn Statement on tax distribution