Question John Tran Finance & Economics
Population Growth and Government Expenditure
Population increases can help to reduce government expenditure. Do you agree?
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Answer Internal Staff
According to Musgrave and Musgrave (1989), changes in population growth create changes in age distribution and this trend is reflected in government expenditure for education and elderly care. Most studies have found an inextricable link between population increases and rising of government expenditures as policies become geared towards narrowing the gap between social and economic services with population growth.
However, the total output of a community can increase without output per worker rising, as a result of population increases. Rising total output might well be associated with constant or falling output per head and thus with an increasing need for government expenditures on services concerned with the relief of distress, and simultaneously with increasing difficulty in transferring resources from the private to the public sector (Peackock and Wiseman 1961). In these circumstances, the link between expenditure and population changes is unpredictable and inconstant over time. Other close factors will likely influence government spending; For example, changes in the composition of the population should be taken into consideration. Many types of expenditure are designed to meet the needs of particular groups and tend to be affected by the numbers in those groups rather than by the size of the population as a whole (Peackock and Wiseman 1961).
Nevertheless, despite population increases, there are constraints which might hinder government expenditure. Political constraints such as the Stability and Growth Pact (affecting EU members) limits government borrowing to no more than 3% of national income annually, and accumulated debt should not exceed 60% of the value of national income. A drawback of public spending is debt burden and as a result government budgets may be reduced in order to reduce debt burden for future generations. However, it should be noted a large number of EU countries had exceeded the burden by 2006.
ReferencesMusgrave, A.R. and P.B. Musgrave, 1989. Public Finance in Theory and Practice. 5th Edn., McGraw-Hill, New York.
Peacock, A.T. and Wiseman, J., 1961. Determinants of Government Expenditure. National Bureau of Economic Research (p12-34)