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Government Expenditure

Economics (Year 12) - Aggregate Expenditure Model

Christian Bien

JobKeeper Waste | ABC News

The above video looks at the way JobKeeper was spent and criticism amongst government expenditure towards corporations that did not need it.

What is Government Expenditure?

Government expenditure is defined as all government spending in an economy. Government expenditure consists of two parts, current government expenditure and capital government expenditure:

  • Current expenditure - government spending on the day-to-day operations of government, for example, the costs of running a hospital. Current expenditure does not change significantly. -

  • Capital expenditure - government spending on infrastructure projects such as Elizabeth Quay, Roe 8 and National Broadband Network (NBN). Capital expenditure tends to change depending on the phase of the business cycle.

What are the Factors of Government Expenditure?

The factors of Government Expenditure are an abbreviation known as COP;

  • Position of the Business Cycle - Government expenditure is aimed at stabilising the business cycle, periods of low economic activity such as in a downturn and trough would see higher levels of government expenditure to offset losses in private spending (consumption and investment).

  • Overseas Business Cycle - The level of economic activity is often dependent on the position of the business cycle of Australia's major trading partners. Low levels of economic activity from Australia's trading partners is likely to result in low private spending requiring larger government expenditure.

  • Government Policy Objectives - Governments need to meet it's economic government objectives of sustainable economic growth, price stability, full employment, equitable distribution of income and efficient resource allocation. Government expenditure needs to be adjusted to meet these economic objectives. For example, high unemployment may require the government to increase expenditure to increase public servants and create infrastructure projects to lower unemployment.

How Government Expenditure was Used in the GFC

During the GFC, the Government produced an underlying budget deficit of $57 billion.

(Source: Budget 2009-10 Appendix I ‑ Historical budget and net financial worth data)

The increased government expenditure included a large fiscal policy response with cash handouts to households and the implementation of the $42 billion 'National Building and Jobs Plan', which included $14.7 billion on school infrastructure, $6.6 billion on Social and Welfare Housing and $1.5 billion promote skilled job growth. (Click here to read more about Australia's response to the GFC - The Treasury)

The increase in the Government expenditure was in response to:

  • The Business cycle - Australia's position in a trough

  • Overseas Business Cycle - Low global economic conditions and widespread economic uncertainty

  • Government Policy Objectives - Government spending was required to:

    1. Increase economic growth to prevent a recession - economic growth reached a low of 0.3%

    2. Lower unemployment - low economic conditions and high uncertainty saw unemployment peak at 5.9%.

    3. Inflation was outside the target band of 2-3%, with inflation at 1.3%. Increased government expenditure will increase demand-pull inflation towards the target band.

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