The Effects of Increase in Government Spending - Essay Example

The shift of scarce resources from the private to the public sector would result in a budget deficit because the government would have to increase the interest rates to capture the attention of the population to buy the debt. An increase in government spending in particular areas can also be an instrumental way of promoting technological innovation, the skills of the workforce, and the social infrastructure. For instance, an increase in government spending on transport infrastructure will not only have a cumulative effect on aggregate demand but will also promote productivity and competitiveness (Riley).

Likewise, if the government spends more on education, it would have direct effects on the population, producing more educated individuals and a skilled workforce. An increase in the spending of the government would have a direct impact on aggregate demand. Increased government spending would cause an increase in aggregate demand, which would in turn have an impact on the entire economy. The increased AD would culminate in the rise in the output as well as the prices. Moreover, over a long period, the increased government expenditure causes a fiscal policy multiplier, characteristic of increased consumer spending (Mankiw 484). Thus, in fiscal policy terms, the increase in government spending would be representative of an expansionary fiscal policy. It would be beneficial to the economy but would result in a budget deficit.

A tax cut refers to a decrease in taxes. The first effect of decreasing taxes would be a reduction in the real income of the government. However, the population would find that its real income has increased. The increase in the real income of the population would encourage people to invest more, which would further boast the economy. The consumers gain more spending power and they acquire greater consumer confidence. In the short run, there would be an increase in savings for the consumers and the economic output. The rise in the spending power of the consumers would encourage them to invest more, thus leading to more jobs and an increase in the employment rate. It would also cause technological innovation and improvements in various aspects of the economy and finally, culminate in an increase in the GDP of the country.
The tax cut has a direct negative impact on national savings in the long run. It has been argued that in the long run, there are chances that the savings and output are going to fall because the government would try to compensate for the revenue losses through changes in the policy; this may include tax hikes (Francis). However, the effects of the tax cut, in the long run, would vary according to the taxpayers.