In 1960's the government biggest proportion of its spending went to investment. In 1962, the amount of government expenditure on investments was around two and half times that of transfer payments. Currently, the boat has capsized, and the spending on transfer payments has grown to over three times the spending on investment. . This indicates a drift of government goals. Precisely, transfer payment was mere 15% of the federal budget in 1960’s but currently it is over fifty percent. Transfer payments refer to the money paid by the government to households for no work done. The payments are done through various social programs. These payments are non-exhaustive because they neither create output nor do they directly absorb resources. In USA, the common transfer payments are the unemployment compensation, social security, and welfare. In the financial year 2011, the total mandatory spending on transfer payment was around $2 trillion. The government uses these payments to redistribute income in the society. In the income flow, the payment is categorized as income received but not earned. The targeted group uses the income to improve their living standards (Taylor, 1).
Classification of Government Expenditure as Consumption Or Investment
Consumption refers to household expenditure on goods and services. Households consume both durable and nondurable goods. Purchase of durable goods includes washing machines, televisions, cars and home computers, however; it does not include the purchase of a family house. On the other hand, investment refers to the expenditure on goods that are used to create wealth. This expenditure may be made by the government or the private sector. For example, government expenditure on a factory to manufacture household goods is an investment. Government expenditure on entitlements cannot be categorized as an investment because the money given as welfare support does not generate any future goods and services. However, government expenditure on infrastructure is an investment because it supports business in the society so the businesses can generate future returns. It is surprising because when calculating the gross domestic product all the government expenditure on entitlement such as Medicare, welfare programs, and social security is not included because the transaction does not involve payment for any services or goods. The entitlements are used by the government to reduce inequalities in the society. Federal investment involves the outlays on maintenance and construction of new infrastructure as well as spending on research and development. Research is categorized as an investment expenditure because the spending is aimed at increasing the available knowledge used in industries to produce goods and services. Mainly, it is geared at improving the level of technology in the economy. Technological innovation Increase efficiency in production this results to increase in output and low wastage in the production process. The innovation is capable of yielding more output even when other factors of production are held constant. This increased output can be demonstrated by an outwards shift of the production possibility frontier that is used to show the combination of goods and services that a society can produce. The transfer payments received by households are spend on goods and services produced in the economy. These payments should, therefore, be categorized as consumption expenditure (Taylor, 1).
The Real Economic Burden of Government Debt
Public debt can either be productive or unproductive. Productive debt is referred to as reproductive debt, and it describes the loans acquired by the government on behalf of its citizens to invest in research and development, construction and improvement of infrastructure, improvement of irrigation and agricultural production, etc. These debts yield some income that can be used to repay the loan principle and even the interest rate in the long run. The investment of the loan in the economy can grow the country’s gross domestic product because it increases production. This expenditure has a multiplier effect on the economy because the initially increased government spending leads to increase in aggregate demand that positively affects the economy. This increase stimulates more investment in the economy, and the overall income is multiple times more than the expenditure of repaying the loan principle and interest charged. Thus, a productive debt yields returns and impose zero net burden to the community. This debt is self-liquidating. Conversely, unproductive debt refers to money borrowed by the state and spends it on its recurrent expenditure or war. The debt does not increase the production capacity of the economy. The amount borrowed is repaid from other sources of government revenue as a tax, more borrowing, and returns of government investments. In many cases, excess borrowing related to unproductive debts leads a country to a point where it cannot repay its debt obligations. This totally cripples the economy (Taylor, 1).
The deficit in the federal budget is financed borrowing from internal and external sources. The money borrowed in 1960’s was mainly used to finance government investment. However, the government spending patterns have changed over years, and the budget deficit is attributed to increasing spending on entitlement. Thus, the government is borrowing to finance transfer payments. The proportion of money borrowed to finance these entitlements consist the unproductive debt while the amount invested constitutes the productive debt. The changing government spending pattern in favor of entitlements increases the unproductive debt. The real economic debt burden increases when the increase in is spent on entitlements instead of on infrastructure or research and development. The amount borrowed and spend on entitlement has a negative multiplier effect on the society. For example, assuming the government borrows from the domestic financial institutions, the money available for borrowing by the private investors falls. This means that the rate of expansion of private fall decreases as the government borrowing increases. The decrease in growth of private firms decreases the available job opportunities. This increases the level of unemployment in the economy because neither the government nor the private sector is expanding its production. The increase in the level of unemployment forces the government to increase its expenditure on the entitlements. This increase in expenditure can only be financed by increasing taxes or increasing government borrowing. The increase in borrowing starts the cycle explained above. On the other hand, increased taxes have several implications. One, increasing taxes on returns on private firms discourages expansion and setting up of new firms. The decrease in private investment results to fall in gross domestic product and increase in the level of unemployment. Two, increasing taxes on firms decreases the number of foreign investors willing to invest in the economy. This decrease in foreign investments decreases available job opportunities. Therefore, the real economic burden of national debt increases rapidly when the government spending changes in favor of entitlements (Taylor, 1).
Taylor, Timothy. "CONVERSABLE ECONOMIST." : Entitlements, Public Investment, and the
Changing Nature of the U.S. Government. 2 Aug. 2012. Web. 02 Apr. 2016. <http://conversableeconomist.blogspot.co.ke/2012/08/entitlements-public-investment-and.html>.