How does government expenditure help increase economic growth?

Alfonso Llanes, studied at Florida International University

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Macroeconomics of Taxation and Government Spending

The government has the exclusive function of finding the right balance between taxation and government spending for the purposes of macroeconomic fiscal policy. Government economic actions are not without consequences. When governments increase their spending, reduces available funds and increases the cost of capital, leading many businesses to abandon expansion projects. Likewise, when a government spends in excess of taxation a deficit spending occurs and must borrow funds to finance that deficit. Taxation can cause problems as well. Taxes tend to shift the balance for goods and services away from its optimum level, and thus, reducing consumer and producer surpluses.

Keynesian economics and new Keynesian economics are the various theories about how economic output is strongly subjective by aggregate demand as a total of spending in the economy.

John Maynard Keynes argued that the solution to the Great Depression was to stimulate the country ("inducement to invest") through some combination of two approaches:

Keynes outlined two approaches independent of each other or applied together to get a stagnant economy to evolve-- monetary policy with a reduction in interest rates and a fiscal policy with government investment in infrastructure by deficit spending.

Keynesian economics was the standard economic model during the latter part of the Great Depression, World War II, and the post-war economic expansion from 1945 to 1973.

The theory follows than when interest rates are low businesses and consumers borrowing cost is decreased, uneconomic investments become profitable, and large consumer sales which financed by debt like houses, automobiles, and appliances become more affordable. This is the function of central banks to guide interest rate through a variety of mechanisms called monetary policy.,

Expansionary fiscal policy consists of increasing net public spending, which the government can affect by taxation, deficit spending or both. Investment and consumption by government raises demand for production and employment, reversing the effects economic imbalance.

Contrary to some critical versions of it, Keynesian economics does not consist merely of deficit spending. Keynesianism recommends counter-cyclical policies. Such as raising taxes to cool the economy and to prevent inflation when there is abundant demand-side growth, and engaging in deficit spending on labor-intensive infrastructure projects to stimulate employment and stabilize wages during economic downturns. There is a counter economic argument for this recipe made by classical economists that one should cut taxes during budget surpluses, and cut spending – or, less likely, increase taxes – during economic slowdown.