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What Is Government Spending?

Government spending is a large part of a country's economy.
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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 March 2014
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Government spending can refer to any expenditure made by local, regional, and national governments. In most countries, government spending makes up a significant portion of the gross national product, or GNP. Spending is accomplished in several major areas, including future investments, acquisitions, and transfer payments.

Future investments is a type of government spending that looks toward the long-term survival of the country. Funds directed toward infrastructure building and improvement, such as road or airport building, are a major component of this type of expenditure. Other future investments may include medical and technological research, or government-subsidized housing construction. Programs that seek to improve or maintain the standard of living for citizens are usually categorized under future investment spending.

Acquisitions refers to expenditures on goods and services meant for individual or national consumption, and is often referred to as final consumption expenditure, or general government spending. This can include imports of goods, but also includes many of the major areas of spending, including military acquisitions, funding for defense, education expenditure, and administrative costs. Government salaries are usually considered a part of this type of spending, though the exact categorization of some spending can seem rather vague at times. Some countries, for instance, define the development of public housing as a future investment, but the development of public hospitals as part of final consumption expenditure.

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Transfer payments are a unique area of government expenditure that involve the transfer of money to eligible citizens or groups. Pension plans, Social Security, unemployment benefits, and government health care plans are usually considered transfer payments, and are categorized separately from general expenditure. Transfer payments may also include the redistribution of national government funds to regional or local governments. Since these types of expenditures are redistributive, rather than directly consumptive in function, they are usually considered a distinct category of spending.

Other types of government spending may include interest payments on debts or payments against an annual deficit. The phrase “paying down the deficit” refers to government funds used to reduce the difference between revenues and budget. Since most modern governments operate in deficit, it is unusual for a national debt to ever be completely paid off. Regional and local governments, however, may be less able to operate in deficit, and thus often do a better job of remaining in balance.

Always a hot political topic, government spending is deeply scrutinized and nearly always criticized in one way or another. For countries that operate with a heavy debt load, the debate frequently revolves around which type of expenditure should be reduced, rather than whether spending should be cut. In the polarizing light of political debate, the finer points of economic theory and reasonable governing are often lost, making it very difficult for many citizens to understand how expenditure decisions are made, and what the likely effects of reduction or expansion of spending will be. Since most government spending is funded primarily through tax revenues from its citizens, this confusion and disconnect between people that provide the funding and people that make spending decisions can often lead to a hostile political climate.

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Operating with a debt load is par for the course for the government and is typically not a problem unless the point is reached where the government can't effectively address its debt. A debate that has been raging over the past few years is whether the United States has reached that point or has gotten close enough to it where it is prudent to stop expanding programs and start looking at getting out of debt.

A good number of economists argue that the nation hasn't reached that point and hold up the number of countries and investors willing to extend credit to the United States as proof. The argument is that the U.S. is still viewed as a good credit risk and, as such, can handle the current national debt and perhaps take on more. Are they right or wrong? Will the economy recover to the point where the tax base is elevated and the nation can start seriously paying down debts? Only time will tell.

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