Governments spend on health, education, defence, infrastructure and welfare to provide public and merit goods and support the economy.
Health: public hospitals and subsidised care. Healthcare is a merit good, and a healthier workforce is more productive.
Education: schools, universities and training. Education is a merit good that raises the quality of labour and future growth.
Defence and law and order: the armed forces, police and courts. These are public goods the market would not provide.
Infrastructure: roads, rail, ports and water supply. These cut firms' costs and raise productivity. Welfare: payments to the elderly, unemployed and low-income households reduce poverty and redistribute income. All spending has an opportunity cost: more on one area means less on another, or higher taxes.
- Main areas
- Health, education, defence, infrastructure, welfare.
- Reasons
- Provide public and merit goods, raise productivity, reduce poverty.
- Opportunity cost
- More spending in one area means less elsewhere or higher taxes.
Worked example: Effects of spending on rail infrastructure
Suppose the government builds a new rail line.
- Short-term effect: construction firms hire workers, so employment and incomes rise.
- Long-term effect: faster travel cuts journey times and costs for workers and firms, raising productivity.
- Wider effect: it may reduce car use and pollution.
- Opportunity cost: the money could have funded hospitals or schools instead.
Watch out for this
Government spending is wasteful because it does not make a profit.
Government spending aims at public and merit goods, fairness and growth, not profit. Its value lies in benefits the market would under-provide.
Check your understanding
Why does a government spend on defence rather than leaving it to the market?
- Defence is a public good that the market would not provide.
- Defence makes a large profit.
- Defence is a demerit good.