Govt Spending JA Stenning Government Spending

Govt Spending JA Stenning Trends in Govt Spending During early 19 th Century, Govt spending as a percentage of national income was low (10%). Big expansion came during and after WW – 1951 saw establishment of the Welfare State and nationalisation of key industries.

Govt Spending JA Stenning Determinants of Govt. Spending 1.State of the Economy: In a recession, govt spending will rise as a % of GDP. GDP falls and automatic stabilisers come into play. As tax revenues also fall, there will be a budget deficit. 2.Political Ideology: Left wing governments more likely to favour public spending. 3.Economic Theory: Classical theory advocates a small public sector, low taxes and low borrowing. Free markets seen as a gaurantee of efficiency. 4.Public Opinion: In 1980’s tax cuts were v popular. Media also play an important role.

Govt Spending JA Stenning Determinants of Govt. Spending 5.Demographic Changes: E.g. issue of an ageing population. 6.Changing Expectations: E.g. people now expect much more from the NHS. 7.Changing Technology. 8.Social Changes.

Govt Spending JA Stenning Financing Govt. Spending Govt spending is almost matched by tax revenues. Most years see the government running a budget deficit. Government can borrow in 2 ways: a.Borrowing from the Bank of England. b.Selling securities (treasury bills or bonds) on the open market.

Govt Spending JA Stenning Factors Affecting Govt Borrowing The amount of government spending. The state of the economy The amount received in tax Political interests Economic theory of the day. A budget surplus is expansionary because it causes AD to expand.

Govt Spending JA Stenning Adverse Effects of Govt. Borrowing Increases the national debt. This is one of the biggest areas of govt expenditure. Borrowing from the Bank of England increases the money supply which can be inflationary. Crowding Out