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

2. Why spending is high or low?
Population demographics – eg. an ageing population
One off events, eg. natural disaster, war, financial crisis
State of the economy - When the economy is weak there will be an increase in spending on benefits to support those who lose jobs or have lower income and an increase in spending on public services as some people switch from paying privately

3. Government spending 3 main items of government spending:
Public Goods: eg defence, fire brigade, street lights - goods/services that the free market would not provide
Merit goods: eg. health, education, transport - these could be provided by markets, but would only be available to those who could afford them. Our society has decided that some goods should be available to everyone, so gov’t provides them
Transfers (not part of G in aggregate demand) - money given by gov’t to those who are disadvantaged, eg unemployed, sick/disabled, and also pensions
Add for them to write down

4. Why gov’t spending is high or low:
Political ideology
In some countries, the predominant view is that individuals should look after themselves, tax rates should be low, and the government’s involvement in the economy should be limited eg. US, Singapore
In other countries, more government involvement is valued – there is more of a social safety net, necessitating higher taxes to pay for it all eg. Sweden, Norway
What about the UK?
Which country has the highest/lowest government spending as % of GDP?

5. What is ‘right’ and ‘left’ politics?
Planned economy: ‘communism’
Free market economy: ‘capitalism’
Mixed Economy
Gov’t makes all decisions
Private individuals & firms make all decisions
Some free market & some gov’t
Left
Right

6. Size of Government Country Gov’t spending % GDP 2014 Denmark 58 France56
Greece 52
Portugal 49
United Kingdom 48
Ireland
Germany 45
Canada 42
United States
Japan
Switzerland 34
South Korea 30
China 24
Singapore 17
Start with sweets in the front. Ask who should have them, prompting a discussion about the size and responsibilities of government
Planned

7. Government Spending Terminology
Fiscal policy
the use of government spending, taxation and borrowing to influence the level and growth of aggregate demand, output and employment
When the economy is weak, the government may cut taxes or increase spending to boost aggregate demand
Budget Deficit
when the government spends more than it receives in tax revenue
gov‘t must borrow to make up the shortfall
each round of borrowing adds to gov’t debt

8. Government Spending Terminology
Budget Surplus
when the government spends less than it receives in tax revenue
The extra money can be used to pay down any outstanding debt
Government Debt
the total accumulation of all the money owed by gov’t
each new deficit adds to the total debt
debt can grow quickly because of interest owing on it
How much does the UK owe? Is this a high figure?

9. Government Spending Terminology
Stock versus Flow? (Debt, Surplus, Deficit?)

10. UK government spending
2010
2015
£billion
Spending
% GDP
Note
Health Care
117
7.8%
134
7.4%
Merit good
Education 88
5.9% 84
4.6%
Transport 23
1.5% 19
1.1%
Total merit goods
228
15.2%
237
13.1%
Defence 43
2.9% 45
2.5%
Public good
Protection 34
2.3% 30
1.7%
Total public goods 77
5.1% 75
4.1%
Pensions
116
7.7%
150
8.3%
Transfer
Welfare
111
6.1%
Total transfers
227
15.1%
261
14.4%
Interest 31
2.1% 46
Ouch
General Government 16 14
0.8%
Various
Other Spending 94
6.3%
113
Total Spending
673
44.9%
748
41.4%
GDP
1,500
1,808
Dictate notes from next slide
Source: ukpublicspending.co.uk

11. Marginal propensity to tax (MPT)
Income (Y)
Tax
(T)
Saving
(S)
Consumption
(C) 50 10 40
100 20 80
150 30
110
200
140
250
170
300 70
190
Some of an increase in income is taxed – withdrawn. The Marginal Propensity to Tax is the percentage of an extra pound in income that is paid in taxes. It is the ‘Marginal Tax Rate.’
What is the MPT between 0 and 250?
What is the MPT between 250 and 300?
Between 0 and 250 what proportion of the increase in income is not spent (withdrawn)?

12. Government Budget deficit
What are the main features of the Govt Budget Deficit?