Government expenditure

Government expenditures means all the expenditures of the public sector from a state. The definition includes different sectors: it is an addition of the consumption of the government, investment, interest expenses, and expenditures for subsidies.

The government has a really big impact on the economy, because of their size. With the use of high taxes and subsidies there is a benchmark for the control of the economy. High budget deficits make it harder to control the money supply and thus the probability of a higher inflation.

Total expenditure of the government

This definition includes current and capital expenditures but without lending and the corresponding repayments.

• Goods and services: That means all governmental payments for goods and services, could be for example the wage for workers.
• Wages and salaries: only defines the cash payments in return for services before the subtraction of taxes.
• Interest payments: payments made to sectors for borrowing money. It doesn’t include governmental loans.
• Subsidies and other transfers: includes all non-repayable transfers to public and private companies. in addition, it also includes the costs of covering liquidity deficits.
• Capital expenditure: This defines as an increase through fixed capital assets, property, intangible assets, government inventories, and non-military and non-financial assets.

Examples of government expenditures

One category mentains thinghs like infrastructure, that means roads, airports, R&D etc. Those exampels improve the output. The other category includes things like education to achieve a better technology development. Those two examples have a huge impact on the long run of a economy .

One topic, public health expenditures got more important through the covid pandemic. Recent literature shows, that there was a big increase in this category, but the positive effect may not be statistically significant.

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 .

Impact of Globalization on the composition of Government expenditures

Different kinds of government expenditures react 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 impact 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.

Government expenditures in Poland

If you compare developing and high-income economies, one of them is Poland, the bigger part of the government expenditure is used for subsidies and other ongoing transfers. The country with the highest amount of this expenditure is the Czech Republic, with approximately 74%. Followed by Poland with a percentage of about 70. Military expenditures percentage of government expenditures: If you compare the years 1992 and 2001 there was a reduction of this percentage. 1992 the part was about 5.5% and reduced to 5.3% eight years later.

References

• Dreher, A., Sturm, JE. & Ursprung, H.W. (2007), The impact of globalization on the composition of government expenditures: Evidence from panel data, Public Choice.
• Fu, Q., & Chang, C. P. (2021),How do pandemics affect government expenditures?, Asian Economics Letters.
• Gloom G., Ravikumar B. (1997), Productive government expenditures and long-run growth, Journal of Economics Dynamics and Control.
• Richert, R. (2021), Makroökonomik - Schnell erfasst Springer Gabler.
• World Bank, (2003), World Development Indicators 2003, World Bank.

Author: Annamarie Dietz