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government (public) expenditurethe current spending and INVESTMENT by central government and local authorities on the provision of SOCIAL GOODS and services (health, education, defence, roads, etc.), marketed goods and services (coal, postal services, etc.) and TRANSFER PAYMENTS (JOBSEEKERS ALLOWANCE, state PENSIONS, etc.). In the CIRCULAR FLOW OF INCOME MODEL, transfer payments are excluded from government spending because these are not made in return for productive services (that is, add to total output) but merely transfer taxation receipts from one household to another.
Government expenditure is an important component of AGGREGATE DEMAND in the circular flow of income/expenditure. In 2003, government expenditure accounted for 15% of gross final expenditure (GFE) on domestically produced output. (GFE minus imports = GROSS DOMESTIC PRODUCT. See Fig. 133 (b) , NATIONAL INCOME ACCOUNTS.
Government expenditure is used as an instrument of FISCAL POLICY in regulating the level of spending in the economy. However, short-term changes in government expenditure may be difficult to achieve because of administrative and political difficulties, especially where cuts in expenditure are being made with a view to contracting aggregate demand. For example, short-term cuts can be difficult to achieve in health, education, etc., expenditures, given the labour-intensive nature of these activities, without heavy redundancies and disruption of public services; while cuts in transfer payments to poorer members of the community are politically unpopular. Furthermore, where the brunt of changes fall upon public investment expenditures, this can severely disrupt long-term investment projects while cuts serve to deplete the social infrastructure. In addition, where government expenditure includes spending on goods and services bought in from businesses, changes can have dramatic effects on the prosperity of the private sector. See SOCIAL PRODUCT, BUDGET ( GOVERNMENT), COLLECTIVE PRODUCTS, CROWDING-OUT EFFECT.