Answer to Question #131677 in Macroeconomics for Neo

Question

Explain two reasons why government spending has increased significantly over the past decades

Answer 1

Government spending has increased over the past decades, some of the reasons have been discussed below;

• Productivity Slowdown.

Governments have always anticipated that they will have a positive growth each year in the gross domestic product. This growth entirely depends on productivity growth which is assumed that each individual worker will produce more than produced the previous year. Since this individuals put more hours to produce, this pushed capital and labor creates inflation which diminishes the nominal value of goods and services produced, rather governments should encourage better and efficient hours in there production. Governments have continued to experience this slow productivity in the recent past and has negatively impacted government budgets.

• Macroeconomic shifts

In the early years of growth of different economies in the world, the countries did not struggle to meet the needs of the people since the populations had not ballooned and also industrial growth was minimal. Equally, the unemployment and inflation levels were also low and the economy was able to meet all the needs of it’s people. As the economies continued to grow, there was much more disposable income and this increased inflation. Later, the budgets set by the governments were surpassed by the requirements of the people and they have become unsustainable. Therefore, the economies started facing major macroeconomic changes when there was slowed growth, inflation, high health care costs and also unemployment. This problems have gone on to-date making the government to have deficits and this has highly contributed to the an increase in government spending.