Government spending in the United States is estimated to reach $2.73 trillion in 2019. These funds are divided into three categories: discretionary spending, mandatory spending and interest on debt. As a business owner, it's essential to have a good understanding of the government expenditure because it indicates where your money goes and what the economy looks like. Based on this information, you can decide whether or not it's the right time to make investments, how much your customers can afford to spend and how to plan your marketing efforts.
TL;DR (Too Long; Didn't Read)
Government expenditure refers to the funds and resources allocated by the government to social goods and services, such as health care, education and infrastructure.
Government Spending Definition
Each year, governments worldwide allocate funds to health care, education, national defense, social services and more. They do so in order to supply goods and services to the public sector, redistribute income, support certain industries and improve the local and national economy. These expenses are referred to as government spending or government expenditure.
The role of government spending is to stimulate economic growth and satisfy the individual or collective needs of the public sector. How these funds are allocated varies among countries.
For example, social protection followed by health and public services were the primary function of government spending in European Union and European Free Trade Association countries in 2016. The U.S., by comparison, allocated 26 percent of its budget to health care, 24 percent to Social Security and 15 percent to national defense in 2017. About 9 percent of funds went into safety net programs and 7 percent into interest on debt. Other government spending examples include education, medical research, transportation, infrastructure and so on.
Types of Government Expenditure
Government expenditure around the world differs in size and priorities. In general, it can be divided into three main categories, namely capital expenditure, consumption and transfer payments.
The funds allocated to products and services for current use to satisfy citizens' needs are categorized as consumption expenditures. These may include education, housing, justice, defense and more. The funds allocated to goods and services that will benefit the economy in the long run are considered capital expenditures. Basically, the government invests in people, infrastructure, research and other areas to increase aggregate demand and stimulate the economy.
Unemployment benefits, retirement programs, financial aid and other expenses that involve transfers of money are considered transfer payments. Their role is to increase employment rates and industrial activity, redistribute income and help people afford school and other basic services. These expenses are not included in gross domestic product, or GDP. In the U.S, government spending as a percentage of GDP was 37.7 in 2016.
Why Does It Matter?
Government expenditure has a direct impact on a country’s economic growth and businesses. For example, if government spending increases, people have to pay more in tax. This means they have less money left after receiving their paychecks and may no longer be able to afford certain products and services. If you're selling luxury goods or more expensive items, you may lose customers and revenue.
Some businesses, however, benefit from increased government expenditure. If you provide goods or services to public schools and other public institutions, you'll earn a steady revenue. Additionally, investments in education and infrastructure, for example, are likely to boost economic growth and labor productivity in the long run.
Government spending also helps reduce income inequality among individuals, but not all countries have effective policies in place. According to the Organisation for Economic Co-operation and Development, the world has reached the highest levels of income inequality in the past 50 years. There's a huge gap between the rich and the poor in Haiti, Zambia, China, Seychelles and other countries. On the other hand, a high GDP doesn’t necessarily translate into well-being or higher living standards for citizens.
- Eurostat: Government Expenditure by Function
- The Balance: Current Federal Mandatory Spending
- Center on Budget and Policy Priorities: Policy Basics – Where Do Our Federal Tax Dollars Go?
- OECD iLibrary: General Government Final Consumption
- Hoosiers By The Numbers: Government Transfer Payments
- Investopedia: Transfer Payment
- IDEAS: Impact Of Government Spending On Income Inequality
- Organisation for Economic Co-operation and Development: Inequality
- Trading Economics: United States Government Spending to GDP
- Our World in Data: Government Spending
- WhiteHouse.gov: An American Budget 2019
- Jupiterimages/liquidlibrary/Getty Images