Government
Government consumption
The level of government spending reflects the role of the state. Government consumption is generally 10 - 20% of GDP, although it is higher in countries such as Denmark and Sweden where the state provides many services. Changes in government spending tend to reflect political decisions rather than market forces. Government consumption includes spending on public sector salaries and purchases of goods and services such as office supplies. But it does not include spending on social security benefits or pension payments. These are called transfer payments, and are treated as personal sector income. Spending related to these is therefore made by the private sector, not the government, and is counted as private consumption.
Level of government
Various problems of definition arise when assessing the public finances because of different treatment of financial transactions by central government, local authorities, publicly owned enterprises, and so on.
In an attempt to standardise, international organisations such as the OECD focus on general government, which covers central and local authorities, separate social security funds where applicable, and province or state authorities in federations such as North America, Australia, Germany, Spain and Switzerland.
Spending can be shifted to publicly owned enterprises which are generally classified as being outside general government. Net lending to such enterprises is part of government spending, but it is not always included in "headline" expenditure figures.
Fiscal years
Many governments run their accounts on a calendar year basis. Britain, Canada and Japan have financial years which cover the 12 months to March 31st; Australia and Sweden's fiscal years run to June 30th; and the US's ends on September 30th. A few countries publish their national accounts data (GDP etc) on a fiscal year basis. These are noted on WorldData.
Public spending classification
There are several possible ways to classify public spending:
|
By level of government: central and local authorities, state or provincial authorities for federations, social security funds and public corporations. |
|
By department: agriculture, defence, trade, and so on. |
|
By function: such as environmental services, which might be provided by more than one department. |
|
By economic category: current, capital, and so on. |
In order to interpret the economic effect of public spending, its breakdown into current and capital spending is usually most instructive.
Current government spending
Major categories of current spending include the following.
|
Pay of public sector employees. |
|
Other current spending: on goods and services such as stationery, medicines, uniforms, and so on. |
|
Subsidies: on goods and services such as public housing and agricultural support. |
|
Social security: including benefits for sickness, old age, family allowances, and so on; social assistance grants and unfunded employee welfare benefits paid by general government. |
|
Interest on the national debt. |
Interest payments reflect the size of the national debt and the level of interest rates payable on that debt. In 1995 interest payments ranged from 1 - 3% of total GDP in Sweden, Finland and Japan, to around 15% in Italy and Greece.
Social security transfers do not directly create output and are not included when measuring GDP. Their size reflects the level of state support, demographics and the economic cycle. Payments are mostly financed by specific employers' and employees' contributions. Where these are passed through a separate social security budget, "headline" spending figures are lower.
Subsidies are left out in the market price measure of GDP, but are added back in as part of the adjustment to a factor cost basis. They range from less than 1% of GDP in the US and Japan to nearly 5% in Sweden.
Other current spending on pay and other goods and services makes up the "government consumption" component of GDP on an expenditure basis. This exceeds 20% of GDP in countries such as Sweden and Denmark where many services are supplied by the government rather than the private sector.
Government capital spending
Capital spending is mainly fixed investment in infrastructure and dwellings. Note that some spending is arbitrarily classified as current spending even when there is a considerable capital outlay, such as in defence. Also, current spending on things such as education, industrial training and research and development might be regarded as investment although they are never classified as such in economic figures.
This capital spending is part of investment in the expenditure measure of GDP. Public-sector investment ranges from around 1.5% of GDP in Britain and the US to a massive 5% in Japan.
Real government expenditure
Monthly government spending figures are always presented in nominal money terms. Judge their influence on the real level of economic activity by deflating them. For example, if government consumption rises by 10% and inflation is 6%, the real level of such consumption is 4% higher.
Quarterly and annual spending figures are available in volume terms. The consumption component can be found in GDP data, although public investment is not usually distinguished separately from private investment in the main GDP breakdowns.
Government revenue
Government revenues are raised largely through taxes, social security contributions, fees or charges for services, and some miscellaneous sources such as interest on government loans. A few governments also conduct trading activities which generate income.
For the industrial countries as a group in the 1980s, personal income taxes, payroll taxes (largely social security) and taxes on spending each accounted for 25 - 30% of the total tax take. The remaining 16% came mainly from taxes on company profits and property.
Asset sales
One other source of income is receipts from the privatisation of activities previously undertaken by the public sector. In some countries, such as Britain, the receipts are classified as "negative expenditure". Either way, they have a once-off effect on public finances and should not be mistaken for an underlying improvement.
Direct taxes
These are levied directly on people or companies. They include taxes on personal and corporate income, capital gains, capital transfers, inheritances and wealth; and royalties on mineral extraction. Social security payments are mostly financed by specific employers' and employees' contributions. Where these are passed through a separate social security budget, "headline" revenue figures are lower. On the other hand, Denmark's social security bill is mainly met from general taxation, which depresses the apparent level of social security revenues.
Indirect taxes
Levied on goods and services, these include:
|
Value-added tax (VAT) charged on the value added at each stage of production; this amounts to a single tax on the final sale price. |
|
Sales and turnover taxes which may be levied on every transaction (for example, wheat, flour, bread) and accumulate as a product is made. |
|
Customs duties on imports. |
|
Excise duties on home-produced goods, sometimes at penal rates to discourage activities such as smoking. |
GDP at market prices includes indirect taxes, which increase selling prices and have to be subtracted as part of the adjustment to a factor cost basis.
Government budget balance
Definitions vary widely between countries. There are two important areas to consider.
|
Level of government. Headline budget figures for North America are for federal government only and for France cover just central government. At the other extreme, those for Germany cover federal, state and local authorities, and Switzerland's include federal, confederations, cantons and local government. The budget balance definition used to judge which EU countries qualified for EMU was general government (central and state/local), different from the definitions normally published by most EU countries. |
|
On or off budget. Many government activities fall outside the normal budget, including lending by government agencies and government farm crop or export insurance, as well as government-guaranteed borrowing by publicly owned enterprises and government-guaranteed lending by private sector bodies. |
Public debt
The public or national debt is the cumulative total of all government borrowing less repayments. It is financed mainly by citizens and may be seen as a transfer between generations. This contrasts with external debt (foreign currency debt) which has to be financed out of export earnings.
Public debt is often understated since governments carry various liabilities which do not show on their balance sheets. For example, public-sector pensions are usually unfunded, that is, paid out of current income rather than from a reserve created during the individual's working life as happens with private-sector pensions.
Public debt should not be confused with external debt (foreign currency debt) which reflects foreign currency liabilities of both the public and private sector.
Related topics:
|
Private consumption |
|
Debt |