What is government spending?
Public spending is a term used to describe the money a government spends. Spending occurs at all levels of government, from local councils to federal agencies. There are several different types of government spending, including the purchase and provision of goods and services, investments, and cash transfers.
In a free market economy, the private sector often does not cover all basic needs. Some goods or services may not be produced, while others may not be produced in sufficient quantity or at affordable prices for all citizens. Much of public spending is involved in creating and implementing these goods and services. This type of government spending is known as final government consumption.
Some examples of government final consumption include the creation and maintenance of military, law enforcement, emergency and firefighting organizations. These are funded by the federal and regional governments in order to provide both the security of the country from attacks and the security of citizens from crimes and disasters. Other examples include programs such as health care, food stamps, and housing assistance for low-income or disabled citizens. Public education and public transport infrastructure are other main categories of this form of public spending.
Another form of government spending is similar to investment, although it is formally known as gross fixed capital formation. This implies the creation and support of systems and institutions that are considered assets to the value of the country's production. Subsidy to farms is one of the main forms of this type of expenditure, because by producing food, farms satisfy one of the greatest needs of any society. The construction of new road systems, bridges and airports are also important areas of this type of expenditure.
Transfer payments refer to expenses that effectively move money from one area of an economy to another. As a government receives wealth through taxes and loans, it has the opportunity to channel some of that money into programs that target certain segments of the population. Some governments that have offered financial aid, such as student loans, may be considered a transfer payment. Government retirement funds, such as Social Security, are also considered pass-through expenses.
Public expenditure is financed through a variety of methods. Governments often use taxes to fund programs and spending, but this is far from the only way to create spending assets. Many governments engage in deficit spending, where the government can borrow against future budgets designed to fund programs. Governments may also choose to borrow from foreign countries to finance expenditure. How money is spent and from what source is a major component of a government's fiscal policy.