| The first thing it is important to mention in response to | | | | and job-seeking schemes, etc. |
| this is that the when government spending exceeds | | | | The imposition of taxes can, indeed, be to finance |
| tax revenue, it leads to a budget deficit. This has been | | | | government spending as previously mentioned. |
| commonplace in the UK for decades but has recently | | | | However taxation can also be used for other |
| become a 'hot topic' for politicians who claim they | | | | purposes. |
| would reduce the budget deficit. | | | | Taxation is often used in the UK to discourage |
| There are many reasons that governments spend | | | | consumers from buying demerit goods such as alcohol, |
| money. Firstly, the government has a responsibility to | | | | petrol and cigarettes. There is some debate as to |
| provide public and merit goods which would otherwise | | | | whether these taxes are purely to finance the incurred |
| be under-supplied in a free-market. Everything from | | | | costs of demerit goods to services like the NHS or |
| street lamps to a police force need to be provided by | | | | whether they are a 'stealthy' way to tax people whilst |
| the government because they wouldn't be supplied | | | | imposing unnecessary constrains on consumers. |
| efficiently or distributed fairly in a free market. | | | | Taxation is of course necessary to finance the |
| Secondly, government spending has a huge impact on | | | | aforementioned public spending: the cost of public |
| the inflation of a country because of its major influence | | | | services should, in theory, be wholly paid for by |
| on AD. The government has a target inflation rate of | | | | tax-payers. There are ways governments try to |
| 2% so if a government needed to increase the rate of | | | | reduce taxes whilst maintaining public services: |
| inflation it might increase spending. | | | | investing tax-payers money in high-return investments |
| Another effect of government spending, related to | | | | can increase the government's budget whilst keeping |
| inflation, is the impact on unemployment. This can | | | | taxes low. However, like has been seen recently, |
| simple be caused by an increase in money circulation | | | | government investments don't always pay off and |
| in an economy, leading to greater investment and job | | | | have a detrimental effect to the government's budget. |
| opportunities. In another way, government spending | | | | This is just a brief overview of how the government |
| can be focussed on creating job opportunities through | | | | spends money and taxes the economy but it covers a |
| measures such as subsidising recruitment, re-training | | | | number of the key reasons. |