What determines government spending In pairs, why might government spending be high or low

Why spending is high or low 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 – What about the UK? – Which country has the highest/lowest government spending as % of GDP?

Size of Government CountryGov’t spending % GDP 2014 Denmark58 France56 Greece52 United Kingdom52 Germany45 Portugal49 Ireland48 Canada42 United States42 Japan42 Switzerland34 South Korea30 China24 Singapore17

Why spending is high or low - 2 Fiscal policy – Fiscal policy involves the use of government spending, taxation and borrowing to influence the level and growth of aggregate demand, output and employment – When the government spends more than it receives in tax, there is a budget deficit. Is there a deficit now? – When the economy is weak, the government may cut taxes or increase spending to boost demand – Draw an AD curve to show what happens to AD if this happens

Why spending is high or low - 3 State of the economy. Why does this matter? – What happens to the number claiming job seekers allowance (claimant count) if the economy is weak? Strong? – What happens to other support such as tax credits if the economy is weak – When the economy is weak there will be an increase in spending on benefits to support those who lose jobs or have lower income Note there will also be a fall in government tax receipts when the economy is weak, and an increase when it is strong

Government spending 3 main items of spending undertaken by governments: 1.Spending on public goods like defence or legislature. – This is to provide goods/services that the market would not provide 2.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) 3.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

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

Data

Marginal propensity to tax (MPT) Another marginal propensity (sorry!) Some of the increase in income of households is taxed Then some of the increase in disposable income is saved In this example, 60% of the increase in income is spent (so 40% is not – it is a withdrawal from the circular flow) Income (Y) Tax (T) Saving (S) Consumpt (C) What is the MPT between 0 and 250? Between 250 and 300? Between 0 and 250 what proportion of the increase in income is not spent (withdrawn)?