Government Spending and its Impact to the Economy

  • Government Spending and its Impact to the Economy

    Where does the Government earn and spend its money? There are two main sources where the Government earns its money:

    • This is the first and beigest source. The Government taxes a lot of things, such as in the Income of individuals (income tax), profits of corporation (corporation tax) sales tax and services, etc.
    • Non-Tax Revenue. These are income which the Government makes from its public undertakings. The Government is also a shareholder in some public sectored banks. When these banks make a profit, this can be a source of Government funds.

    Where does the Government spend?

    • Revenue Expenditure. This is the expenditure that the Government has to incur for its function. Examples of this is paying the salaries of Government employees, the utilities of Government offices, allocation of money to certain offices, etc.
    • Capital Expenditure. These leads to the formation of assets in the economy. Examples of this is when the Government spends money on building roads, public schools, hospitals, railways etc.

    When the Government spends more, the Government is experiencing a Fiscal deficit. Fiscal deficit is not necessarily a bad thing if taken under control. If the Government is mostly spending money on capital expenditure, the government is still creating assets for the economy. These assets will give return in the long ran. However, if this is not checked and the Government spends way too much money, then things can get problematic. Below are some effects it can bring to the economy.

    • High Inflation
    • Higher Interest rates
    • Higher taxes
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