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Government Spending


General government expenditure - consists of the combined capital and current spending of central government including debt interest.


General government final consumption - is government expenditure on currently provided goods and services excluding transfer payments.


Transfer payments are transfers from tax-payers to benefit recipients through the working of the social security system. The total welfare bill now exceeds 100 billion per year.


Why We Need Government Expenditure

Providing public and merit goods

See unit 2.


Redistribution of income and wealth

One aim of the social security system is to carry out a redistribution of income and to reduce income inequalities by providing a basic minimum level of income for those out of employment and income replacement for those who have recently been made redundant.   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.  Progressive taxes also have the effect of diminishing the gap between those on low and high incomes although the tax and benefit system on its own can never hope (or seek) to eliminate income disparities between individuals and groups.


Regulation of economic activities

The government intervenes via enforcement agencies to ensure that economic activities do not adversely affect the public interest. Examples include the Office of Fair Trading and the Competition Commission (formerly the Monopolies and Mergers Commission).  In recent years there has been a growth in the number of regulatory agencies established. These include the regulatory bodies set up to monitor the performance of the privatised utilities. Examples include Ofwat, Ofgem, Offer (see unit 2 for more information).


Influencing resource allocation and industrial efficiency

This is achieved via regional policy which aims to reduce regional economic disparities within the UK. The Department of Trade & Industry implements policies to encourage the competitiveness and performance of the UK corporate sector.


Influencing the level of macro- economic activity

Public spending has an important role to play in stabilising the level of aggregate demand 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. There is a debate about how effectiveness this form of expansionary fiscal policy is in stabilising the economy.  When the economy is growing, certain items of government spending will tend to fall. These include social security payments. For example when real GDP is rising and more people are finding work, the government will not have to spend as much on the Job Seeker's Allowance and other benefits such as income support and housing benefit.




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