Factors Affecting Government Spending
Government spending especially on government entities is affected by a wide range of non-income factors. They include earthquakes and floods. However, there are other important determinants that affect overall government spending. They are limited to specific categories including government policies and politics
Politics play a very crucial role in determining government spending. Politics always bubble around government activity where political winds blow in different directions. In most cases, politics reduce federal deficit and reduces government spending especially on social programs.
Such forces decreases government purchases in a downward shift of the government’s purchase line. Politics also affect government spending because powerful interest groups often convince political leaders to focus more on activities that are important to the government. The government will then focus on national defense, space program or the environment thus reducing its overall spending.
This kind of shift in political winds causes increase in government spending. As a result, an upward shift in the government’s expenditure line also occurs.
Policy choices affecting government spending
Tax policy- the government imposes taxes on different products and services with an aim of promoting economic growth. This raises the level of revenue that the government collects from different sectors of the economy. Increase in taxes increases government spending and vice versa.
Trade policy-when a country allows for free trade, the economy grows and it increases government spending. However, a government that restricts trade by imposing strict policies leads to economic inefficiency. This reduces government spending. It is essential to note that economic efficiency through free trade promotes government and boosts the standards of living.
Monetary policy-monetary regime is one of the factors that can hinder a country’s economy based on its impact on government spending. With a stable monetary system, there is a good environment for government spending. With a poor monetary system, investment opportunities are crippled and economic confidence in people as well as the government is destroyed thus, reducing its spending.
Private property- this is also one of the policies that affect government spending. It is also considered as an independent policy affecting the level of government spending. Availability of property rights plays a very crucial role in promoting government spending and economic growth. Additionally, if the government controls major resources, it is more likely for political forces to dominate different economic factors thus, determining how resources will be allocated.
Therefore, for any level of government purchases or spending, the security of different property rights will also have a strong effect on economic performance.
Regulatory policy-red tape and bureaucracy also have a very considerable effect on government spending and the economy at large. A deregulated market encourages efficient government spending and allocation of different resources. This is based on the fact that major spending decisions are made as per economic factors in the market. Excessive regulation on the other hand results in high costs of different products and services as well as inefficient government spending behavior.
Fiscal policy also affects government spending. When there is desire by the government to control economic instability, the level of government spending will increase and vice versa. When aggregate expenditures decreases, government spending on different businesses may also increase.
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