How effective would an increase in government spending be at promoting economic growth? Economic growth is best defined as a long-term expansion of the productive potential of the economy. Sustained economic growth should lead higher real living standards and rising employment. Short term growth is measured by the annual % change in real GDP. Government spending is a way of increasing aggregate demand, and if successful can help boost economic growth. Government spending tends to be directed at infrastructure and maintenance, as this not only creates jobs but creates a valuable asset.
Some government spending is necessary for economic growth as if it were zero, enforcing contracts, protecting property and developing infrastructure would be extremely difficult. Another way of putting this is that some government spending is necessary for successfully enforcing the law. There are of course costs to increasing government spending, but there are also many benefits. One cost is that for governments to spend money, they must first take it from someone. This is commonly achieved through taxation, which discourages productive behaviour. A balance must also be made when increasing tax. This is because an increase in tax means that businesses must either charge more or make smaller profits, so inflation will occur at an increased rate as a by product. Borrowing money is another option, but brings with it interest rates and this money must be paid back. Government spending also has the effect of displacing private-sector activity. Every pound sterling the government spends effectively means one less pound in the productive sector of the economy. There are some ways government spending can have a high rate of return, such as the maintenance of a well-functioning legal system. Unforunately governments tend not to use resources efficiently. Destructive choices are often made as a result of government spending, often through...
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