The government is involved in the economy in many ways. It sets the rules and regulations that any endeavor must adhere to. However, the government’s most discernible involvement comes in the form of spending. How the government spends its money directly influences economic parameters. The government can create jobs by increasing expenditures in times when unemployment is widespread. It can cut down on expenditures to cool down the economy in times of high inflation.
Spending can have huge implications for any economy since government budgets have the capacity to fund even the largest of projects. Building a dam or a highway system costs so much that only the government can invest in those projects and finish them in the foreseeable future.
Governments often use this instrument to tinker with the economic outlook, which economists call "fiscal policy". Fighting economic evils like unemployment and inflation in bad times while helping the demand boom when total output does not seem to hit its potential.
However, there are some downsides to such interventions, which can prove detrimental to the nation’s economy in the long run. Spending by the government is financed by taxes. Therefore, governments need to increase their revenue by levying more taxes on citizens. Another negative aspect would be the higher inflation scenario that occurs if the government chooses to finance its spending by printing money instead of taxes. Excess money circulating in the economy does have inflationary effects, which spoil citizens’ welfare.
Government spending is a valuable tool if it is used wisely by the authorities. Handling it improperly has fatal implications.
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