Definition: Public spending is money spent by the government through any of its entities or institutions. It is also known as public expenditure and usually refers to any kind of government spending.
What Does Public Spending Mean?
Governments need to spend on goods and services to carry out a wide range of activities. Central and local governments as well as state-owned companies are also included in this matter. Most of that money is obtained through taxation. Public spending tends to have a huge impact on the economy. As governments purchase goods and services many companies produce profits, hire people and consume materials and inputs.
Indeed, higher public spending generally drives economic growth, at least in the short-term. In contrast, lower spending reduces economic growth. Other forms of spending are transfer payments to people like unemployment allowance and pensions. Economists often recommend that public spending should be limited to activities and functions that fit in the purest role of the government. These are actions that try to correct the so-called market failures and to provide public goods.
This means, to do what the free market cannot do on its own. Any other type of spending would be inefficient, under the assumption that resources are more efficiently allocated by the private sector than by the State. Nevertheless, many decisions in relation to public spending are based on political motivations instead of technical analysis. Some governments increase spending on social programs just a few months before an election with the aim of gaining advocates.
Example
A small town called Ishiwa in Japan is currently aiming to provide better public services to its residents. The town’s mayor has designed a plan that includes gas, electric and water distribution concessions that will be granted to private companies.
This project also includes a considerable amount of money that needs to be invested in building certain structures required to improve the current town’s infrastructure, such as street lights and bus stops. The funds required to finance such project will come from the federal government, private companies and tax income.
