How Effective Would an Increase in Government Spending Be at Promoting Economic Growth?

A fiscal deficit is when a government's total expenditures exceed the tax revenues that it generates. A budget deficit can be cut by either reducing public expenditure or raising taxes. In this essay, I am going to analyse the benefits and costs of increasing tax rates to reduce fiscal deficits instead of cutting government expenditure.

Public expenditure - Spending made by the government of a country on collective needs and wants such as pension, provision, infrastructure, etc.

Economics growth is, it the short run an increase in real GDP and in the long run an increase in the productive capacity of an economy (the maximum output that the economy can produce). GDP stands for Gross Domestic Product which is the country’s production of goods and services valued at market price in a given time period. Real GDP is when these figures are corrected for inflation using a base year (The UK uses 2003 as its base year). It can be measured in three different ways; the output measure is the value of the goods and services produced by all sectors of the economy; agriculture, manufacturing, energy, construction, the service sector and government. The

When a government’s spending exceeds its revenues causing or deepening a deficit it is called deficit spending. Deficit spending is only one of numerous tools used to help manage the economy. Deficit spending is presumed to stimulate consumer demand by helping the consumer to obtain more money to spend, in turn, the demand of product will rise. There are advantages and disadvantages to deficit spending that we will discuss further below.

Depending on who you are asking, deficit spending is either considered to be advantageous, or disadvantageous. Spending is always a heated topic in economics, and with the last presidency, it’s even a hotter topic. Government spending and the deficit has a large impact on the economy, because of the effect on short and long-term economic growth.

With increased spending, the government tends to increase taxes in order to meet the cost. This in reverse, threatens productivity among the

Government spending and its influences on economic growth is a hotly debated issues among professionals. Policymakers are divided between whether an economy can expand or is stripped of its potential to grow as government spending increase. Spending on for example infrastructure and defense are constructive, many economists question that public spending has decreasing marginal benefits and lead to crowding out of the the private sector. Supporters of larger government spending claim that government programs offer valuable public goods such as education and infrastructure which would not work efficiently if they were privately owned. Furthermore, an argument advocates use is that in government spending can boost economic growth by putting money into people 's pockets. Proponents of smaller government have the opposite view. They argue that governments which are too big destabilize economic growth by not allocating resources to the most efficient user and take away from the productive sector of the economy to government. This paper evaluates the influence of government spending on economic performance. It examines the theoretical arguments, reviews evidence and highlights the latest academic research.

Deficit spending applies to businesses, governments, and individuals alike. In relation to governments, deficit spending refers to spending more money than taking in over a given period (Investopedia, n.d.). Some Keynesian economists argue that deficits are a necessary evil needed to stimulate an economy. In theory, the deficit spending fills a gap in consumer spending during a recession by increasing government purchases to balance out the aggregate demand and stabilize the unemployment rate (Investopedia, n.d.). However, the downsides to deficit spending include possibly lowering GDP and increasing debt. Lastly, crowding out is known as the process where high government spending takes opportunities away from private sectors, hence the name “crowding out” (Investopedia, n.d.). This paper will explain some of the advantages and disadvantages to deficit spending while reviewing some of the effects of crowding out in an economy.

The idea of economic growth is from the beginning of economic history seems to be the prime target of a nation and economist seek out new ways to create a framework through which a continuous growth can be maintained over long period of time which can bring out a major difference in the state of a nation and its well being. It 's a worthy target as historical data confirms that a very low level of growth over a long span of time can bring out a great difference. For example, according to information from Lawrence H.(2011), if we adjust average growth of U.K. over a long span of time (between 1830 and 2008, just 178 years ), we will see the growth rate was pretty minimal, only 1.97%. But if we measure the increase in GDP as a whole - the

In addition to this, ‘the government’s effort to sustain growth in the manufacturing sector, improve the country’s infrastructure, expand municipal utilities, and balance regional economic disparity will help growth in construction spending’. (Freedonia).

This brings us to another economic principle, government can sometimes improve market outcomes (Mankiw, 2012). The United States is a great example of economic growth being impacted by government action, especially in the year 2013. At the end of the first quarter of 2013 the U.S. growth rate was approximately 1.8%. This is attributed to a number of things, specifically reduced spending within the U.S. by both consumers and the government. Most notably, fiscal consolidation and budget sequestration could be to blame (Hamshere, 2013). These two decisions reduced government spending and in the case of sequestration stopped spending for a temporary period of time. Although these policies are not directly economic, meaning they weren’t made with the economy in mind, they do effect the economies performance. The largest part of any governments job is to enforce the laws that allow businesses to operate and maintain rights over their real and intellectual property. Once this is completed, as it is in most developed nations, the government can further impact the economy through measures that help guide the economy. Lending rates, taxation, and environmental, and worker rights policies can all impact the rate at which an economy grows.

Shenggen Fan and Neetha Rao (2003) made a thorough research to review the trends in government expenditures in developing countries. They analyzed the causes of change developed an analytical framework in order to determine impacts of government expenditures on economic growth. They have found out in their result that structural adjustment programs have resulted in more government spending, which is against the wide expectation. They have also stated that there was disparity in the way the different sectors were treated with more attention given to education, defense, and health. Although education expenditure is the largest (15.9%), the percentage is smaller than in Asia and Latin America. Defense accounts for 10% of total government expenditures in the region, similar to Asia but more than Latin America in 1998. Their finding

Public expenditure is the main instrument used by governments especially in developing countries to promote economic growth which is an essential component for sustainable development (MOFED 2010). However, composition of government expenditure has been attracting the attention of economists due to its effects on the level of growth (Sharma B. 2012).

How does the government manage the above?, constructing schools to have a more prepared population, promulgating laws that promote the investment to be able to generate more and better workplaces and, finally, developing infrastructure that allow to advance towards the achievement of the targets, like highways, energy sufficiency, etc. And for this, the government needs money.

Bose,Haque,Osborn (2003) where I do believe in their arguments that public expenditure made by the government will surely shape the economic growth of the country. It can be seen in the policies made by Tun Razak which initiated in 1970 known as NEP or New Economic Policy that have bring the country to be one