Fiscal Policy and Economic Regulations
Where does the money go? Government spending explained.
What It Is and How It Works
Governments have expenditures on a vast array of activities: the construction of infrastructure, the employment of public servants (such as teachers, doctors, and police), the subsidisation of industries, the payment of pensions, and the transfer of income to the ones in need. Public expenditure can be classified by function (health, education, security), by type (current or capital expenditure), and by institutional allocation (e.g., ministry or state secretariat).
Government expenditures can alleviate expenses that would otherwise burden the private sector or would not be viable. Governments can offer services themselves or subsidise private enterprises to guarantee the provision of basic services. Expenditures are frequently shared among the various levels of government (national, provincial, municipal).
Government expenditure became more dominant following the work of John Keynes in 1936 and especially in the post-World War II period. It became understood that government expenditure could stimulate demand, promote consumption, and decrease unemployment. All expenditure has to be funded, and this is mainly done through public debt, taxation, and monetary issue, but also from other sources such as international aid or state-owned enterprises.
►
The Policy’s Impact
Public spending alleviates private sector costs and supports services that might not otherwise be provided. It stimulates economic growth, especially during downturns, by boosting consumption and creating jobs. However, spending needs to be financed through taxes, debt, or other means, and decisions on where to allocate funds often involve trade-offs. In times of high unemployment or poverty, governments may prioritise social transfers; during prosperity, they may focus on infrastructure or export stimulation. Also, high government spending can lead to inflation by ‘overheating’ the economy.
►
Stakeholders and Political Implications
Public spending affects various sectors differently. For example, construction companies benefit from infrastructure spending, while changes in public sector wages have a greater impact on teachers and police officers. However, the effects of expenditures often overlap: a construction worker’s child may attend public school, so they care about education budgets, or a teacher may depend on good road infrastructure to commute if a government aims to avoid a deficit (more spending than earnings, which increases national debt), increasing one type of spending often requires cutting others or raising taxes.
►
Debates among Economists
Economists debate the optimal level of government spending. Some argue for low, controlled spending to avoid inflation and protect private investment, while others believe that under certain conditions, governments should spend heavily to eliminate unemployment, stimulate growth, and ensure greater equality.
►
Real World Examples
The war in Ukraine caused a spike in global energy prices, prompting many countries to subsidize energy consumption. For instance, Italy implemented a €14 billion aid package to help citizens cope with inflation.
For more on Italy's response, visit: Reuters - Italy Approves Aid Package.