Study notes

External Environment: Government Spending (GCSE)

Government spending is also known as public spending and in Britain, it takes up over 45% of GDP. Spending by the public sector can be broken down into three main areas:

Transfer Payments

Transfer payments are welfare payments made available through the social security system including the Jobseekers' Allowance, Child Benefit, State Pension, Housing Benefit, Income Support and the Working Families Tax Credit. The main aim of transfer payments is to provide a basic floor of income or minimum standard of living for low income households.

Current Government Spending

This is spending on state-provided goods & services that are provided on a recurrent basis every week, month and year, for example salaries paid to people working in the NHS and resources for state education and defence. The NHS claims a sizeable proportion of total current spending – hardly surprising as it is the country's biggest employer with over one million people working within the organisation!

Capital Spending

Capital spending includes infrastructure spending such as new motorways and roads, hospitals, schools and prisons.

How does government spending affect businesses?

The level of government spending has many direct and indirect effects on all businesses. For firms selling goods and services to individual consumers and to other firms:

  • Increased government spending may mean higher taxes
  • Higher taxes reduce the ability of customers to purchase goods and services, which is likely to reduce consumer spending

Consequently increased government spending is often at the expense of private sector spending and is therefore potentially harmful to some firms

On the other hand, many businesses rely on government spending for their revenues and profits. For businesses that supply services to the public sector, demand is directly linked to how much government is spending. Good examples include:

  • Construction firms that build and repair the road network
  • Publishers who supply schools and colleges
  • IT systems consultants who develop computer systems for public sector organisations

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