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Government Spending
- Falah Ahmad
- Apr 14
- 3 min read
What It Is and How It Works
All states in the world -through their governments- spend. The reasons may be diverse: they build roads, erect traffic lights, hire policemen, judges, teachers and doctors, subsidize some companies or industries, pay pensions, transfer income to people in need, and many, many other things. Public spending covers such a wide range of functions and actors that it can be classified in various ways: According to its function (health, education, security, etc.);
according to whether it is current or capital (expenditures that are made every year or long-lasting investments such as highways); and according to their institutional allocation: by ministry or state secretariat.
The Policy’s Impact
In either case, the public spending relieves expenses that would otherwise be incurred by the private sector or could never be made. In some cases they provide public services directly through public companies, and in others they subsidize private companies to guarantee the provision of basic services. Depending on the institutional organization of the country, expenditures may be distributed among the different state levels (nation, province, municipality, etc.).
In general, all countries have their own legislation describing how public spending should be presented in national budgets.
With Keynes' work in 1936, and especially after the second post-war period, public spending acquired a preponderant role in stimulating aggregate demand. It was observed that, with increased spending, the state could stimulate consumption to grow the economy and thus reduce unemployment (one of the main scourges of the interwar period).
Of course, all spending must be financed in some way. The main instruments of state financing are 3: issuance of public debt, tax collection, and monetary issuance, although others can be added, such as international aid (significant in some African countries) or revenues from public enterprises.
Stakeholders and Political Implications
All sectors and actors in a country are in one way or another affected by public spending, although not all in the same way. For example, while construction companies are mainly affected by public spending on road construction, public school teachers and police officers are more affected by the evolution of spending on salaries. However, later on it is more complex: maybe the son of the owner of a construction company goes to public school so he is also concerned that education has a sufficient budget, or the teacher who travels a long way to work is concerned that the roads leading to his school are in good condition and that the traffic lights are working properly.
If government does not want to increase the deficit, the decision on which expenditure to increase at a given moment always finds a trade-off with the reduction of another, or with the imposition of a new tax. At times of high unemployment or high poverty, the transfer of income to the poorest sectors may be prioritized, while at times of greater prosperity, it may be allocated to the construction of infrastructure necessary for development, or in the face of an external sector crisis due to a shortage of foreign currency, a peripheral country may choose to encourage its exports.
Some Debates Among Economists
While the more orthodox currents maintain that the State should have a low or controlled level of spending in order not to accelerate inflation or substitute private investment, more heterodox currents assure that - under certain conditions - some States could (and even should) spend all that is necessary to eradicate unemployment and stimulate growth, while guaranteeing a greater level of equality among citizens.
Real-World Examples
When the war in Ukraine-Russia caused an increase in the international price of energy, many states decided to subsidize part of the consumption. Here is the Italian case
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