Government expenditure

Government expenditures means all public sector the expenditures of a country. This definition includes various sectors:This is the addition of government consumption, investment, interest costs, and subsidy spending^[1].

The government has a tremendous impact on the economy, because of its size. High taxes and subsidies provide a benchmark for controlling the economy. A large budget deficit makes it harder to control the money supply, making it more likely that inflation will rise ^[2].

Total expenditure of the government

This definition includes current and capital expenditures, but excludes loans and the corresponding repayments.

Goods and Services: This means all government payments for goods and services, such as workers' wages.
Wages and Salaries: defines only the cash payments in return for services before tax.
Interest payments: payments made to sectors for borrowing money. Government loans are not included.
Subsidies and other Transfers: includes all non-refundable transfers to public and private companies. in addition. It also includes the costs to cover liquidity shortfalls.
Capital expenditure: This is defined as an increase in fixed assets, property, intangible assets, government inventories, and non-military and non-financial assets.

This is just a examples for the seperation of the categories. Literature shows also inaccurate classification^[3].

Examples of government expenditures

One category mentains thinghs like infrastructure, that means roads, airports, R&D and so on. These exampels improve the output. Other categories include education to achieve a better technological development. These two examples have a huge impact on the long-term nature of the economy ^[4].

One topic, public health expenditures got more important through the covid pandemic. Recent literature indicates, that this category increased a lot, but the positive effect may not be statistically significant^[5].

Government spending in the IS-LM Model

If the government decides to increase its spending, that's a kind of extended fiscal policy. In the classical IS-LM Model, the IS Curve shifts to the right due to this action. Then you can obtain some consequences. First, the income of the households increases. The overall demand increases then too. That means the demand for money is also higher. Second, the interest rates are increasing, because to keep balance through the first effect in our model. But after the households recognize the higher interest rates that automatically reduces their income. Furthermore, the demand for investment gets less. This has again an effect on the interest rates. If there is a reduction in income the demand for money will be less.

Normally fiscal policy is effective, but the expansive net effect is weakened through a partial crowding out effect through governmental demand. Overall fiscal policy is in the model more effective, if the interest rate elasticity of investment demand is lower and if the interest rate elasticity of money demand is higher ^[6].

Impact of Globalization on the composition of Government expenditures

Different kinds of government expenditures respond differently to globalization. Through globalization, the governments got more pressure and decide to concentrate more on capital expenditures. As a result, it shows that using econometric analysis, there is no effect on the composition of government expenditures through globalization. Literature shows three possible explanations for this result. The efficiency and compensation effects could neutralize each other. Additionally, there could be indirect effects between the expenditure categories. The last reason the effects of globalization may not exist is because of overstating the topic^[7].