Does Government Spending have an effect on Economic Growth

Proponents of government spending over and over again point to the fiscal multiplier as a way that spending can fuel growth. However, proponents of smaller government have the contrary view. They make clear that government is too big and that higher spending undermines economic growth by transferring extra resources from the productive sector of the economy to the government, which uses them less efficiently. The multiplier is a factor by which some measure of economy-wide output such Gross Domestic Product increases in response to a given amount of government spending. According to the multiplier theory, an initial burst of government spending trickles all the way through the economy and is re-spent over and over again, thus growing the economy. A multiplier of 1.0 implies that if government created a scheme that hired 200 people, it would put precisely 200(200*1.0) citizens into the work force and a multiplier larger than 1 implies more employment and a number smaller than 1 implies a net job loss. On the other side, critics of government spending argue that at best this type of spending merely replaces the spending that would have otherwise occurred in the private sector – it is similar to taking money out of your right pocket and putting it in your left. As worst, government spending brings about the negative side effect of gloomy production through taxation. However, one of the most significant Economists called John Maynard Keynes advocated government spending, even if government has to run a deficit to conduct such spending. He asserted that when the economy is in a downturn and unemployment of labor and capital is high, governments can spend money to create jobs and employ capital that have been unemployed or underutilized. Which side is right about government spending? Indeed, almost every economist would agree that there are circumstances in which lower levels of government spending would enhance economic growth and other circumstances in which higher levels of government spending would be desirable. The views of spending presume that government knows exactly which goods and services are underutilized, which public goods will be value added and where to redirect resources. However, Taxes finance government spending; therefore, an increase in government spending increases the tax burden on citizens- either at the present or in the future- which leads to a reduction in private spending and investments. This effect is known as “crowding out”. We know that government spending reduces savings in the economy, thus increasing sensitive investments. If not done with careful measures, government spending reduces savings in the economy, thus increasing interest rates. This can lead to fewer investments in areas of infrastructure used to contribute to the country’s output. In conclusion, however, government spending more in particular in sub Saharan Africa should center on productive sectors of the economy predominantly agriculture and trade to smooth the progress of rapid development. Spending on productive sectors should, however, lend a hand in improving the competitiveness and the much needed modernization within Small and Medium Enterprises, particularly in agriculture to permit them grow up much faster with improved capacity and human resources. Ends