Definition: Government expenditure refers to the purchase of goods and services, which include public consumption and public investment, and transfer payments consisting of income transfers (pensions, social benefits) and capital transfer.
What Does Government Expenditures Mean?
What is the definition of government expenditures? A government spends money towards the supply of goods and services that are not provided by the private sector but are important for the nation’s welfare. Government spending goes to the nation’s defense, infrastructure, health and welfare benefits.
Furthermore, governments subsidize startup industries or industries that cannot propel their operations with funding by the private sector, such as transportation or agriculture. The transfer payments for pensions is not a flexible instrument of fiscal policy, while unemployment benefits depend on the cycle of the economy, i.e. recession or expansion. Conversely, income transfers to private firms in the form of financial and fiscal incentives reinforce investment activity and employment. In this sense, government spending enables the redistribution of income.
Let’s look at an example.
Example
According to the OECD, the United States government spent $3.7 trillion in 2015 or 21% of the GDP, with $3.2 trillion being financed by federal revenues, including income taxes, payroll taxes, and corporate income taxes. In 2014, the United States government spent 38% of the GDP.
Total government spending is important for the economic activity of a nation. First, it affects the rate of growth and the level of production in the private sector. Secondly, in the developed economies, the state controls a significant part of the total economic activity. So, given the significant differences between the economies in terms of economic growth, a key question is the possible influence of the state in these differences.
Of course, in some countries, government expenditure fails to meet the criteria for improved social benefits. This is mainly the outcome of under- or over-utilizing the nations’ economic resources. For instance, the road network is one of the key pillars of government expenditure. Although the benefit from the existence of the road network is not always immediately visible, four more minutes of additional movement per day per employee may not sound like a significant amount of time, but it adds two working days per year.
Summary Definition
Define Governmental Expenditures: Government expenditure means a governing body purchased goods or services.
