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Government Spending

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The History of Government Spending

Economists classify government spending into three main types:

  1. Government final consumption expenditure – includes the government acquisition of  goods and services for current consumption of the members of the community.
  2. Government investment or Gross capital formation – includes government expenditures of goods and services that will create future benefits such as research and infrastructure.
  3. Government expenditure for intermediate consumption – includes the government acquisition of goods and services that are made by its own or acquiring goods and services from other market producers.

Transfer payments are government expenditures that do not involve acquisition of goods and services but are money transfers. These include social security payments and other trust funds or surplus. Government spending is supported by taxes, government borrowing and seignior age.

The gross domestic product, also known as GDP, is composed of the government investment or government gross capital formation and government final consumption expenditure.

Among the first economists to promote government deficit spending to become a part of the response of the fiscal policy to economic contraction is John Maynard Keynes. In his theory, increased spending of the government will raise the demand for aggregate funds and will result to increased consumption, thus, increasing production. Economists who are advocates of the Keynesian economics believe that the Great Depression ended because of the government spending programs and military spending intended for World War II. According to Keynesian economists, a country in severe economic depression won’t end if the government will not take action or it won’t do anything to intervene.

The United States of America’s government spending is published by the United States Census Bureau and this is updated annually through the Statistical Abstract of the United States. One problem in interpreting and analyzing the government expenditures is that the records are reported on a cash flow basis. Government spending may be better understood if it is presented in accrual basis.

The United States Census Bureau updates the records every 5 years by conducting a state and local government financial census and this is further updated annually. The latest reported census was done in 2006.

If you review the history of government spending, you will notice that the overall government expenditure of U.S. has significantly increased from 7 percent of the GDP in 1902 to 35 percent last year. The major events that affected the economy and the government spending over the past centuries include the World War I and World War II.

The government expenditures as a percent of the nation’s GDP shows that the increase in spending is slow and consistent in education. The significant increase is manifested in defense spending during wars because of the budget allotted for the military force. Major spikes may be seen during World War I, World War II and the Cold War. Welfare spending, on the other hand, decreased during the Great Depression and in 1996. Government spending on Social Security and on pensions started showing up in 1950 while spending on health care took off after Medicaid and Medicare were established in 1960s.

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