Why does government spend?

There are many reasons for government spending. These can be

To Provide Public goods

Public good is that good, consumption by one individual does not reduce availability of the good for consumption by others; and that no one can be effectively excluded from using the good. These goods are of importance to the general public and hence are provided by the government. Example defence, street lighting etc.

To provide Merit goods

A merit good is a commodity which is judged that an individual or society should have on the basis of a norm. The government feels that everybody should enjoy these goods irrespective of their incomeFor example, health and education. In most of the economies, governments spend a major part of their expenditure on health and education.

To maintain and promote economic growth

Public spending has an important role to play in maintain and promoting economic growth in the economy. Increases in government spending on state provided goods and services add to total domestic demand and can have multiplier effects on the final level of equilibrium national income.

Ensure welfare of the state

One of the government’s main objective is to provide reduce the gap between rich and poor and thus government provides services like health and education to the economically weaker sections of the society free of cost or at a subsidised rates. The social security system also tries to provide a safety-net for those who suffer unexpected falls in income arising from unemployment, separation and bereavement.

USEFUL LINKS FOR FURTHER STUDY

• Article on BBC 'What the budget has in store'
• US Government Spending data

Economic Objectives of the Government

Most of the governments round the world have four main objectives. These are

• Keep inflation under control
• Maintain a low level of unemployment
• Achieve a high level of economic growth rate
• Maintain a healthy balance of payments.

Government spending or government expenditure is classified by economists into three main types.

• Government purchases of goods and services for current use are classed as government consumption.
• Government purchases of goods and services intended to create future benefits, such as infrastructure investment or research spending, are classed as government investment.
• Government expenditures that are not purchases of goods and services, and instead just represent transfers of money, such as social security payments, are called transfer payments.