SESSION 3: GOVERNMENT EXPENDITURE AND FISCAL POLICY 

Dear student, I trust you are already familiar with the concept of fiscal policy within macroeconomics.

So far, we have discussed the essence of fiscal policy in terms of its function as a discretionary instrument for demand management. This session focuses on a more comprehensive analysis of government expenditure and taxation decisions in terms of their overall structure and the role of public sector finances.

Objectives At the end of this session, you will be able to;

• enumerate the elements of government sector finance
• list the levels of government expenditure
• explain the implications of government expenditure

Now read on…

Read Session 2: PROBLEMS OF FINE-TUNING AGGREGATE DEMAND

3.1 Government Sector Finance

There are three broad elements to government sector finance. These are:

1. expenditures at national and local levels;
2. taxation to provide an income to the government at all levels in order to finance these expenditure plans;
3. government borrowing if expenditure exceeds the income

3.2 Government Expenditure and Fiscal Policy

In the fiscal year 2015, the Government of Ghana’s total expenditure, including payments for the clearance of arrears and outstanding commitments for the first three quarters of the year, amounted to GH29,469.5million (22.1% of GDP) against a target of GH29,501.8million (22.0% of GDP)).

Government spending is a significant contributor to the circular flow of income in all industrialized economies and, as such, is a significant driver of changes in the national income level.

The injection occurs on three levels:

1. at the national level by the central government;
2. at the local level through regional governments and metropolitans/ municipalities /districts (local authorities);
3. through state-owned enterprises, government agencies, and trading services All of this expenditure takes the form of both current account expenditure (such as books for schools, notepaper for government offices, staff salaries, energy costs, etc.) and capital account expenditure (buildings, roads, etc.).

In addition to current and capital account items, central and local governments also make transfer payments, such as for state pensions, child benefits, and housing subsidies.

All of these categories of expenditure play a significant role in the operation of an economy in terms of the provision of public and social services, the creation of jobs, and the redistribution of national income among various segments of society.

3.3 Implications of Government Expenditure

Government spending has significant effects on the private sector. Some government spending (e.g., on law and order, education, health care, and transportation) contributes to a healthy and productive private sector.

Without law and order and the preservation of private property rights, business trading and investment would certainly collapse.

Spending on education and health increases the skills of the labor force and decreases time lost due to illness, respectively. Good roads and other transport connections reduce the costs associated with international trade.

Therefore, government spending can be of great benefit to the economy, provided it is conducted efficiently (without waste).

Additionally, any portion of government spending that is not spent on imported goods and services increases domestic demand for domestically produced goods.

This holds true regardless of whether the expenditures are transfer payments to the household sector, subsidies or grants to the business sector, or direct government spending on products and services.

Through the multiplier effect (which is reinforced by the accelerator effect), the initial increase in government expenditure will result in an even greater increase in demand for the output of the private sector, thereby increasing aggregate demand. government spending must be financed to counteract this, however.

This session has established that government sector finances are comprised of government expenditures, taxation, and borrowing. We also learned that there are three levels of government spending and that government spending affects every aspect of the economy.

Self-Assessment Questions

Exercise 3.3

1. At what levels does government expenditure occur?
2. What are the components of government sector finance?
3. What are the implications of government expenditure on the economy of Ghana?

 

SESSION 2

CONTINUE WITH SESSION 4