PUBLIC SPENDING

Each year national, state, and local governments create a budget to determine how much money they will spend during the upcoming year. The budget determines which public goods to produce, which spillovers to correct, and how much assistance to provide to financially disadvantaged people. The chief administrator of the government—such as the president, prime minister, governor, or mayor—proposes the budget. However, the legislature—such as the congress, parliament, state legislature, or city council—ultimately must pass the budget. The legislature often changes the size and composition of the budget, but it must not make changes that the chief administrator will reject and veto.
Government spending takes two forms: exhaustive spending and transfer spending. Exhaustive spending refers to purchases made by a government for the production of public goods. For example, to construct a new harbor the government buys and uses resources from the economy, such as labor and raw materials. In transfer spending the government transfers income to people to help them support themselves. Transfers can be one of two kinds: cash or in-kind. Cash transfers are cash payments, such as social security checks and welfare payments. In-kind transfers involve no cash payments but instead transfer goods or services to recipients. Examples of in-kind transfers include food stamp coupons and Medicare. Recipients of food stamp coupons exchange the coupons for groceries.
As recently as the 1960s most spending by the U.S. government was exhaustive spending for items such as national defense, roads, airports, schools, and parks. In the mid-1960s transfer spending began to grow rapidly. In the United States today, over 50 percent of federal government spending is for cash and in-kind transfers. About 20 percent of state and local government spending is transfer spending.

Contributed By:Robert H. Haveman
Source : Microsoft ® Encarta ® 2006.