Students of economics know that one of the main injections in the circular flow of income is government expenditure. The circular flow of income represents the flow of money, goods and services in the economy, through the various economic agents such as households, firms and the government.
An injection means an introduction into the flow. Other injections include exports, investment and consumption.
The opposite of injections into the circular flow of income are withdrawals, such as taxation and imports.
In Malta total government expenditure as a percentage of the gross domestic product stood at 38 per cent in 2016 compared to 41 per cent in 2011. However, total expenditure increased by just over one-third between 2011 and 2016, an increase of €962 million. Total expenditure in the first six months of 2017 increased by just under 10 per cent, which is a hefty increase compared to previous years.
The portion of government expenditure to gross fixed capital formation (the term used to denote capital investment) stood 6.5 per cent in 2016 compared to 6.7 per cent in 2011.
Thus percentage figures do appear to change much over the year, indicating stability in trends.
However, as one digs deeper into the figures, one notes certain indications.
In 2016 the largest component of government expenditure was compensation of employees. It reached €1,182 million in 2016 compared to €882 million in 2011.
The percentage increase is 34 per cent that is in line with overall government expenditure. The increase in total compensation of employees was of 6.4 per cent in the first half of 2017 when compared to the first half of 2016, so less than the overall increase.
The next major component is social benefits. It reached €1,086 million in 2016 compared to €879 million in 2011, an increase of 23 per cent, this outstripping the general overall increase.
It needs to be appreciated that government expenditure has various policy objectives related to it
When one considers that social benefits and compensation to employees are both essentially forms of income for people, one notes that the expenditure on the income of persons increased from €1,761 million in 2011 to €2,268 million in 2016.
Thus government expenditure that goes directly into people’s pockets represents 60 per cent of total government expenditure, down from 62 per cent in 2011.
Another significant component is intermediate consumption which increased from €430 million in 2011 to €637 million in 2016. Intermediate consumption refers to the purchases of goods and services by government. The increase over a five-year period was of 48 per cent, well above the overall increase.
It needs to be appreciated that government expenditure has various policy objectives related to it. These can be grouped into three. First government expenditure has the role of redistributing wealth in the economy through social benefits or social programmes such as health and education. Second, government expenditure has the role of supporting the economy, such as through subsidies given to employers.
Third, government expenditure is required to provide the necessary resources to manage the country, such as providing for law and other and providing for public administration.
There are of course other policy objectives that government may wish to meet through its expenditure.
However, any government also needs to make sure, that apart from reaching its set policy objectives, it also needs to ensure that its expenditure is sustainable in the long run. Otherwise government would be forced to operate with a fiscal deficit that a country may not be able to afford.
So the critical question that needs to be asked is how much of this expenditure will lead to an increase in the growth potential of the economy, which will in turn enable a further growth in expenditure and how much of the expenditure is leading to increased short term consumer demand, whose benefits will be dissipated over a short period of time.
While society should benefit from the wealth generated in the country, it also needs to keep in mind that this wealth will not last for long if we do not generate further wealth.