5.2.5—Government spending

Government spending includes current spending on services and transfers, and capital spending on assets such as infrastructure. It affects aggregate demand directly when the government buys goods and services.

Spending on transfers changes household disposable income and may alter consumption; spending on education, health or infrastructure can also affect long-run productivity. Classify the channel before predicting the macroeconomic effect.

Building a rail link is a direct demand injection and may later raise productive capacity. A benefit payment mainly affects demand through the recipient’s consumption decision.

All government spending is not equally productive, and a larger budget does not automatically mean a larger AD shift if taxes, imports or saving offset it.