Government expenditure is a term used to describe money that a government spends. Expenditure occurs on every level of government, from local city councils to federal organizations. There are several different types of government expenditure, including the purchase and provision of goods and services, investments, and money transfers.
In a free market economy, not all basic needs are generally met by the private sector. Some goods or services may not be produced at all, while others may be not be produced in enough quantity or at an affordable rate for all citizens. Much of government expenditure is involved in the creation and implementation of these goods and services. This type of government spending is referred to as government final consumption.
Some examples of government final consumption include the creation and maintenance of the military, police, emergency, and firefighting organizations. These are funded by federal and regional governments, in order to provide for both the safety of the country from attack, and the safety of citizens from crime and disasters. Others examples include programs such as health care, food stamps, and housing assistance for disabled or severely low-income citizens. Public education and public transportation infrastructure are other main categories of this form of government expenditure.
Another form of government expenditure is akin to investing, though formally referred to as gross fixed capital formation. This involves the creation and support of systems and institutions that are seen as assets to the producing value of the country. Subsidization of farms is one of the major forms of this type of expenditure, since by producing food, farms provide for one of the largest needs of any society. The building of new road systems, bridges, and airports are also major areas of this type of spending.
Transfer payments refer to expenditures that in effect move money from one area of an economy to another. As a government receives wealth through taxes and loans, it has the opportunity to funnel some of that money into focused programs for certain segments of the population. Some government offered financial aid, such as student loans, may be considered a transfer payment. Government retirement funds, such as social security, are also considered transfer expenditures.
Government expenditure is financed through a variety of methods. Most often, governments use taxes to fund programs and expenditures, but this is far from the only means of creating assets for spending. Many governments engage in deficit spending, where government may borrow based on future projected budgets in order to fund programs. Governments may also choose to take loans from foreign countries to finance expenditure. How money is spent and from what source is the main component in a government's fiscal policy.
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