Government Impact on Economic Growth

Monetary policies play significant roles in national struggles to improve development and growth in an economy, through expenditures and growth profile variations. Fiscal policies represent one of the major policies of the government that impact economic accomplishments by increasing taxation revenue and controlling cost levels. Based on the model developed by Keynesian, fiscal policies that can be expanded targets to fuel the economy by increasing costs or reducing taxes or both. If the plan fails, the government is expected to incur losses thus failing to achieve the projected rate of economic growth. Government expenditure signifies economic growth engine by contributing to the productive increase in a country’s economy, specifically, if the cost is utilized correctly on important distinct economic divisions. An economic recession may arise if there is a deficit in state’s budget. Some policymakers support the idea that government expenditures help boost economic growth while some are against it. The supporters of this idea argue that public goods like infrastructure and education aid the growth of the economy. On the other hand, the non-supports claim that the government is large and maximum expenditures slows economic growth. Therefore, government spending has both advantages and disadvantages.

Economic growth refers to the potential development of a country’s output or GDP. Economic development offers the insight to understand why growth rates differ from one country to another over time. This research paper evaluates the different effects of government in the economy. The study bases its explanation on theoretical arguments, recent literature reviews, financial evidence, and specific country examples. Additionally, it explains the process of data collection, findings, discussions, analysis and a conclusion.

The economic literature, particularly models of macro-economy warrants the presence of a link between GDP and government spending. The relationship of GDP and expenditure has attracted attention from various researchers and economists for numerous years and has been an intensely controversial subject. Economic theories in many instances do not instantly generate suitable solutions concerning government expenditures and economic performance. Certainly, most economists support the idea that low government spending in some cases boosts economic growth. According to Wagner’s Law of increasing states activities, expenditures of government grows incessantly, in its relative or absolute size, by communal achievements. With increasing rates of industrializations, there is an active improve in economic performance. Economists in support of Wagner’s theory believe that effective government involvement through saving and spending stimulates the need for services and goods in addition to financial stability and growth.

The Keynesian theory developed by John Maynard Keynes a British economist also gives a basis for the relationship between government expenditure and economic performance. Keynes believes that economic performance/growth of a country depends on increasing demands. Therefore, financial expenses of any state are not restricted to benefit-cost analysis. Based on Keynes argument government spending improves economic progress by introducing procuring control into the economy. Governments should reverse financial downturns by asking money from private companies and paying the debts via numerous programs of expenditure.

Various studies regarding government and economy have been conducted over the past years up to today. Under this section, different data from collected from the scholarly journals will be highlighted. Cooke studied the fundamental link between government expenditure and economic growth (GDP) in Sweden between 1960-2001. From his research, he realized that there is a strong relationship between GDP and government spending. In 2014 Olulu and his colleagues investigated the functional relationship of the expenses and financial progress in Nigeria between 1990 and 2004. From their results, the relationship between spending and monetary growth is inversely proportional. Additional comparative data collected to determine the relationship between government and economic growth is as shown in figure four. The figure represents the general performance of the United States and Europe.

Government expenditures in Sweden have been categorized into three parts investments, consumption, and transfers. Transfers refer to redistribution of resources other sectors in the country from public sectors, for example, pension systems, benefits of unemployment, etc. Investment expenses deal with constructing and acquiring long-term assets like hospitals, roads and buildings. Interest expenditures result from the debts accrued by the government. In 2001, sixty-percent of expenditure was transfers. Figure one shows the transfers, interests, and investments. Over the years, the economy of Sweden has increased significantly. Heightened economic reallocation stimulated the growth of the Sweden economy.

Figure four shows a comparative analysis of the United States and Europe expenditures. The diagram illustrates that the USA spends almost fifty-percent of Europe’s income. Big government sectors are associated with enormous government debts and taxes. The US economic progress over the past decade depicted a 50% increase more than Europe. Secondly, unemployment in the US has significantly decreased, thus having fewer expenditures than Europe. Many variables of policies play an impact on economic development. For example, over-structured job market possibly causes the high rates of unemployment in Europe. Feeble development estimated can be an aftermath of elevated levels of tax rather than government expenses/spending.  However, with the existence of these many limitations, there is a relationship between greater government expenses and deteriorated economic growth.

In Nigeria, the recurring budget expenditures have a stable development. The development expenses were steady between 2004 and 1990. Capital costs developments, on the other hand, are inconsistent. High rates of costs are observed in 2000, 2001, 2002, 2003 and in between 1990-1996, 1998-1999 the rates were constant. Monetary spending was very low thus the there was hardly any remarkable economic growth.

The expenditures of a government should be decreased. Currently, most countries have portrayed a fast increase in spending rates. Rates expenditure various countries have increased due to the need of investing more in national defense. States must employ a suitable fiscal plan centered on smaller government divisions. Economic restraints must be regarded as chances to develop a financial virtue from the financial needs. Many expenses of a government have negative fiscal impacts. To know if the government uses money responsibly, returns from foreign and local investments are high. In case the government’s return rates are lower than those of private organizations; economic growth will be slowed. The results for most countries indicates high spending rates with reduced economic growth.

The principle factor of the difference in expenditure and growth does not depend on the government size but how government investments are managed. Deficits and taxes decline economic progress. Some countries go to extreme extents of borrowing money from private companies and invest in less productive programs leading to delayed repayment, and thus debts pile up. Economic policies must concentrate on lowering the levels of spending and participate in successful projects.

The results acquired from different academic books are not enough to provide us with all the solutions/answers we need in about the topic at hand. Distinguishing factors that lead to economic decline may not be an easy task because economic growth is altered by various factors from time to time and country to country. Due to globalization, it is important to manage the spending of every country. Currently, it is very easy to capital and jobs to migrate to a foreign market. Sound policies returns are excellent, and the result of bad policies are costly. To further highlight the growth levels in the selected countries, governments should ensure that necessary capital management and expenditure are keenly managed to enhance the capacity of productivity.