2.2.4 Government expenditure

• Trade cycle


  Another term for the business cycle, which refers to the stage of economic growth that the economy is in
• The economy goes through

  1. Periods of booms

  2. Periods of busts
• Recovery stage


  • Real output increases when there are periods of economic growth
• Boom


  • Economic growth is fast, and it could be inflationary or unsustainable
• Recession


  • Real output in the economy falls, and there is negative economic growth
• During recessions, governments might

  1. Increase spending to try and stimulate the economy

  2. Spend on welfare payments to help people who have lost their jobs

  3. Cut taxes
• Increasing government spending and cutting taxes during recessions

  Increases the government deficit, and they may have to finance this
• During periods of economic growth, governments

  • Receive more tax revenue since consumers will be spending more and earning more
  • Spend less, since the economy does not need stimulating
  • Fewer people will be claiming benefits
• Fiscal policy


  Governments use it to influence the economy, it involves changing government spending and taxation
• What governments might spend on

  • Public goods
  • Merit goods
  • Welfare payments
• Fiscal policy


  A demand-side policy, it works by influencing the level or composition of AD
• Discretionary fiscal policy


  A policy which is implemented through one-off policy changes
• Automatic stabilisers


  Policies which offset fluctuations in the economy, including transfer payments and taxes, triggered without government intervention
• Expansionary fiscal policy during economic decline

  Increasing spending on transfer payments or on boosting AD, or by reducing taxes
• Contractionary fiscal policy during economic growth

  1. Decreasing expenditure on purchases and transfer payments

  2. Increasing tax rates to reduce the size of the government budget deficit