The government spends money on different things needed for the economy to ensure that standards of living in the country remain high and avoids the country from going down during recession. In a return the government receive money from taxes such as VAT, NI Tax, Income tax etc which is from the general public.
This chart shows the different things that the government spend on.
When the government spends money in the public sector it indirectly spends money in the private sector as workers from the private sector will be hired and paid for the work done. This is done as they need specialist skills that are essential for the work for example building a school. Contractors will be needed for any construction work that will be needed.
Deficit Funding – This is when the government expenditure is higher than what they receive.
Government spending is so important in an economy that they are sometimes forced to borrow money when they don’t have enough due to overspending. To improve standards of living and to avoid the country going into a recession Deficits are funded by borrowing money from banks. Short term money can be raised by buying Treasury bills from the banks which are short term government securities which pay little interest and discounted. If the government wants to pay for long term finances, government bonds will be formed which Is a promise to repay money borrowed after a particular period of time with certain rate of interest.
To repay the money back they government will then have to cut back on the money spent, raise taxes or save more money.
This chart shows how much the government receives from taxes.
Government Spending On:
National Agencies –
* Road Building
* Cleaners to clean and maintain the roads.
* NHS – Hospitals, walk in centres, Home for the elderly etc. They are built to help the public with their health.
Local – In the local agency, the government spends money on
* Local authorities –
* Library – Books, computers etc will need to be paid for.
* Council – They offer homes to the general public, cleaners to make sure the environment is clean etc.
* Shopping centres
– Builders and constructers will be hired from the private sector in order for these building to be built. Money will then be spent to pay for their wages, the builders will then spend money on the equipments they need in order to complete the task, the business they purchased the products from will now earn more of a profit and maybe hire more staff and expand, the staff will be paid and they will also spend their earnings or save the money they make, in order for the cycle to carry on employees will get taxed and the money will go back to the government. Also, the paid workers might decide to purchase new clothes from next, thus increasing next’s sales figures. This shows the multiplying effect in the business, money moving around in the economy. This would impact my business as it would bring more money and this will help the business make more of a profit.
* Equipments are essential for any organisation in order for them to work at the best of their ability. The equipments needed would be, computers, stationary, books, working area.
* National Aid
* Shelter for the homeless
* Drug & Alcohol Campaigns & help lines
When the government spends on the voluntary sector, they spend on drug and alcohol organisation such as ‘Frank’ to help people who have an addiction to drugs. They give them different options from counselling and helping them get over the addictions and maybe consider going into education or employment. There are other organisations such as child help line for children who are being abused and have no one they can talk to. They would have to go to the private sector to buy goods like equipments, programme schemes etc, from there the money will then be transferred from the voluntary to the private sector, then the private sectors will then pay their workers, the workers pay tax (leakages going back to the government) and spend (money goes around in the economy)
* The equipments they may need for this job role is computers, telephones, stationary and a working area. When people become homeless, they are offered temporary accommodation which is all paid for by the government, form electricity, gas, food etc.
With the help form the government there will be a reduction of self harm and alcohol or drug related sicknesses which will later on be a burden on the NHS, so helping these people can also be seen as an advantage as it stops them from getting ill and ending up in hospitals which are also paid for by the government.
* Multiplier effect: This is the number of times that additional government spending on the economy re-spent and the resulting overall increase in spending (Dooley et al page 270)
Leakages – This is the savings and taxes that are paid in order to reduce the effects of the multiplier, increasing the economy.
The multiplier effect will lead to Aggregate demand (AD) which is the total demand.
Aggregate Demand – This is the total amount of demand for goods and products in the economy.
The more money spent in an economy, the more Aggregate demand increase. The multiplier effects occur because of investments in the economy.
If the government decrease public spending e.g. transportation, this will have an effect on the economy, as the multiplier effect will be affected this would lead to an increase in aggregate demand (consumers request for more buses to run).
During the multiplier effect, the government spends is passed around in different sectors of the economy. Money invested in the public sector (NHS) s passed to the private area (construction company) when improvements are made to the hospital. The construction company then invests in a voluntary business (donation to smoker’s aid).
If the government spend more money in the economy, Aggregate Demand will increase due to the investment.
This will have an affect on my chosen business which is Tesco as when the government spends money on the public sector; it indirectly spends in the private sector.
A small increase of government spending can have an effect on the economy, if the government chooses to spend money in a particular area in order for businesses to start up, it would lead to employment for the general public, who will then repeat the multiplier effect. This will lead to more disposable income for people and also have a positive effect on Tesco.
-When Aggregate Demand increases, people will now have more money to spend and this will have an effect on Tesco as a business as more customers will now be shopping there as they have more money to spend and they may go for the quality goods sold instead of buying cheaper products. This will help Tesco grow and also increase their sales and profits and keep their business running very well.
As Tesco will now be making more money, their confidence will be at its highest and they may want to expand which will mean hiring more staff to keep up with demands, introducing more products, opening different branches both locally & nationally. The demand for their products will be high which will lead to GDP increasing.
As Tesco provides services it will beneficial for them to export their goods worldwide, they provide exports to other countries by banking.
* Tesco will keep the business running as people will stay in employment and continue to spend.
Deficit funding will impact by Business as taxes will increase because the government has to gather funds in order to finance the countries debt and to keep the country stable.
The company may result to making some of their staff workers redundant due to the fact that the taxes increase and the company’s expenditure figures also increases so they will need to reduce their expenses figures.
If the government chooses to spend less money on a certain area in the economy for example on transportation, it could result in a fall in the standard of living in the UK. If this happens, Tesco will begin to lose their business confidence as the level of the profit their making will fall, which can lead Tesco into recession. The consumer’s confidence will decrease because they will not be able to afford to buy luxurious products which are sold at Tesco, this will result to a fall in the demand of products and could cause the level of sale and profit in the business fall.
If Tesco’s business is not running at the best of their ability due to less customers or less money, then investors will not invest their money in shares in the business.
Overall government spending helps my chosen business as it helps them stay afloat and keeps their business running because it spends money in the private sector without realising.
* The government shortage would have a multiplier effect on the economy which would then impact on Tesco’s:
1. Foremost of all, the government invests money in the defensive side of the country (police).
2. Out of the money invested, the police force then decides to donate some to building shelters for the homeless (voluntary) and also purchase various items such as batons, shields, etc. The police workers then decide to buy some food items from Tesco’s (private).
3. Out of the money invested in they then decide to pay the police workers. The workers and business are then taxed; the taxes received are classified as a leakage.
Conclusion: The multiplier effect came into action from when the government invested money in the country’s police force. The police force then had to go and buy more gear from the private sector, as well as investing money in Tesco’s ( buying there products). The government gains back some of the money invested through taxes (income tax, corporation tax, etc).