OverviewIncreasing government spending to fight recessions occurs through the fiscal policy. This is a policy that is passed by the government in regards to its revenue and expenditure to impact the economy (Butkiewicz & Yanikkaya, 2011). For example, the government can be able to increase its revenue by increasing the taxes or have more expenditure by using money on various programs. Economists as both an advantage and a disadvantage have viewed increasing government spending to fight recession. For this reason, it is important to analyze the advantages and disadvantages of government spending to overcome recession
In Support of Increased Government Spending
Increasing government spending has a substantial impact on the level of aggregate demand (AD) (Butkiewicz & Yanikkaya, 2011). This is because government spending allows a reduction in the interest rates and the pushing for more savings of the money obtained through the low rates as opposed to consumption. When there is an increase in government expenditure on goods and services, this can compensate for failings in other constituents of aggregate demand such as downfall of the household expenditure on consumer goods and also compensate on firms expenditure of the capital goods (Deockhyun, 2015). When the spending is on capital goods, the country’s infrastructure can be enhanced and in the process, this improves the economy. Further, increased government spending can fight recession when it directly puts money where it needs to be. The government can direct money to specific projects, regions, or sectors to influence the economy where it is believed to be the most needed (Deockhyun, 2015). Targeting government spending is an objective way of enhancing the economy to create an environment of rebuilding to achieve economic stability. This means that the government can be able to make decisions that free money that obligates that it should be spent on consumption. The extra revenue into the sector maintains the levels of demand giving room for businesses to operate at capacity and eliminate the potential problem of layoffs through the creation of new jobs (Carter, Craigwell & Lowe, 2014).
Further, increased government spending has the ability to use taxation to eliminate negative externalities. This means taxing such as the U.S. tax on cigarettes or on those that are overusing the limited resources allows alleviation of negative effects while at the same time generating more revenue for the government. When the government has more revenue, it can direct it to other sectors that need more money to enable stabilization of the economy. The idea of increased government spending, therefore, is largely objective in creating an environment of stability that private sectors cannot offer (Deockhyun, 2015). Further, critics of increased government spending argue that it creates deficits or debts. However, it is important to recognize that government spending in most aspects enables the growth of Gross Domestic Product (GDP) and this can bring the debt down. It is beneficial at this level to have increased government spending because the debt/GDP ratio falls when money is targeted to the sectors or regions that it is needed most in the economy (Carter, Craigwell & Lowe, 2014).
Against Government Spending
Critics of government spending point out that it presents the problem of crowding out. The idea of crowding out means that increased government-spending results in more government borrowing and in the process lead to higher interest rates and this offsets the incentive effect that the government had aimed for initially (Deockhyun, 2015). If the government faces budget deficits, it would need to source for funds from the public or look for foreign borrowing. This leads the government to issue out bonds that have the consequences of raising interest rates within the economy. This occurs because government borrowing upsurges the demand for credit within the financial markets. This can easily minimize the aggregate demand for goods and services and this reverses the whole purpose of having a fiscal stimulus (Deockhyun, 2015).
Time lags are another problem of increased government spending. If the government has plans of increasing spending, it may take a long time between the time of spending and actually seeing the benefits if the spending. It can take a long time to filter through the economy and it can be too late to deal with the recession (Deockhyun, 2015). For example, if the government plans to increase spending in the health sector it mostly takes months or years to implement and then many more years before the full benefits are seen. There is a delay that occurs in executing any alterations to the spending patterns and this cannot help with the recession. Additionally, increased government spending can be detrimental if the government is misinformed. For example, if the government perceives that there will be recession, it acts by increasing the aggregate demand but if the prediction was wrong and there was a fast growth in the economy, then the government would lead to inflation.
Lastly, when it comes to increased government spending, other components of aggregate demand must be considered. For instance, when the confidence of consumers or the public is very low, the act of lowering taxes may not result in consumers spending. This makes the whole process of fiscal stimulus impractical (Carter, Craigwell & Lowe, 2014). In addition, when the government increases taxes to lower AD, it can create hindrances to work. When such factors occur, they result is a fall in productivity and the aggregate supply could come down. There is also a possibility that the impact of fiscal stimulus can also become deflated or muffled when the money directed to the economy by ensuring tax savings and also government spending is used up on imports. This means that the money is sent abroad and does not remain in the local economy to help deal with the recession (Carter, Craigwell & Lowe, 2014).
I believed increased government spending is ineffective because it poses negative economic impact. Government spending removes a lot of money from the private sector and in the process creates deficits. Taxes and deficits are harmful to any economy because they leave the public venerable and lower the AD (Carter, Craigwell & Lowe, 2014). Many of the targeted projects do not bring out the results expected and instead lead to additional costs and as such, increased spending should be eliminated. Further, it is evidence that increasing government spending by raising taxes creates an environment of inefficient distribution of the resources. This is because the government becomes less effective in its spending of the money and in giving the public stability. It is also evidence that such increased government spending can be marred by inefficient and wasteful projects. It depends on how and what the government spends on to create the results expected (Carter, Craigwell & Lowe, 2014).
- Butkiewicz, J. L., & Yanikkaya, H. (2011). Institutions and the impact of government spending on growth. Journal Of Applied Economics, 14(2), 319-341.
- Carter, J., Craigwell, R., & Lowe, S. (2014). Government Expenditure and Economic Growth in a Small Open Economy: A Disaggregated Approach. Working Papers (Central Bank Of Barbados), 1-26.
- Deockhyun, R. (2015). Fiscal spending and economic growth. Journal Of Economic Development, 40(4), 90-104.