Cambridge O Level Business Studies · Syllabus 7115 · External Influences on Business Activity
Government Spending
What is Government Spending?
Expenditure by government on goods, services, infrastructure, public sector employment and transfer payments. It reaches businesses through two distinct routes: directly, as demand, when government buys goods and services or awards contracts; and indirectly, when public sector pay and transfer payments raise households' incomes and therefore consumer demand. Higher government spending does not reach every business, because the benefit is concentrated in the sectors and regions where the spending occurs.
This definition is part of the External Influences on Business Activity chapter in Cambridge O Level Business Studies.
Government Spending in context
Government policy, environmental and ethical expectations, and globalisation are external forces a business cannot control but must trace through to a specific effect on itself. A change in taxation, government spending or interest rates reaches a business's costs, prices, demand and cash flow by a different route each time. A private cost is paid by the business itself; an external cost falls on a third party outside the decision — residents living with pollution, for example. Appreciation of the home currency helps importers and hurts exporters, and depreciation does the reverse, so the direction of any exchange-rate effect depends on naming the currency and the firm's position.