Spending

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How do governments spend taxpayers money?

As well as the services we use every day, like your school or the healthcare you receive through the NHS, the government’s spending decisions also help spur on investment in the private sector too!

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The SQA Higher specification for this section:

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These summary slides are best viewed fullscreen on a computer. If you are on a mobile device, access fullscreen here.

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Knowledge Checkpoint: Describe the three main types of government spending

How does UK welfare spending impact households?

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Transfer spending plays a crucial role in income redistribution. Earlier, we discussed how progressive direct taxes mean that higher earners face a higher tax burden. Through transfer spending, the government transfers this income from richer to poorer households.

The outcome of this transfer is that income inequality is significantly reduced:

“The average household income of the richest fifth of people, before taxes and benefits (£107,600) was 13 times larger than the poorest fifth (£8,200). However, this reduced to 4 times larger (£79,200 and £21,400, respectively) after taxes and benefits.” (ONS)

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Since poorer households pay less tax and receive more benefits than richer households, they have a higher net position than richer households (after accounting for tax and benefits). Let’s explore this in the chart below:

The Magic of the Fiscal Multiplier: Boosting GDP

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One of the benefits of public spending, in addition to funding public services, is that it can increase GDP. The extent to which public spending supports the economy depends on the size of the fiscal multiplier.

Government spending creates income somewhere else in the economy. For example, UK current spending provides an annual income for 5.6 million public employees in the UK.

A positive fiscal multiplier means that £1 of government spending will increase the size of GDP by more than £1. In the example of public sector employees, this happens because increased income of workers leads to increased consumption of goods and services elsewhere in the economy.
This is particularly important in times of recession, when government spending can provide crucial support for the economy by preventing significant spending decreases (see automatic fiscal stabilisers).

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The Many Uses of Multipliers: The Fraser of Allander Institute regularly uses multipliers to estimate the economic impact of policies, businesses and sectors. A high multiplier indicates that the business or sector has a positive economic impact. The following link provides an example of how economists use multipliers, predicting the impact of Scotland’s pharmaceutical industry.

Pharmaceutical industry a key player in Scotland’s life sciences sector | FAI

The pharmaceutical industry is a significant contributor to the Scottish economy and a key player in Scotland’s life sciences sector, according to an independent report from the University of…

fraserofallander.org

Pharmaceutical industry a key player in Scotland’s life sciences sector | FAI

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Knowledge Checkpoint: Explain how changes in government spending can influence the economy, providing examples of austerity and expansionary policies

Continue to learn about the government budget!