User:Nick Gardner /Sandbox

Accountable effects

Public expenditure may be expected to affect a country's accounting aggregates such as its gross national product and its rate of economic growth. Investment in the infrastructure may be expected to affect transport costs, and the maintenance of publicly-owned assets may be expected to affect their future running costs. Spending on health and education may be expected to affect future output as a result of its effect upon human capital, and there is some evidence to suggest that reductions in income inequality resulting from social expenditure can increase social capital, although it has also been suggested that it can have output-reducing consequences arising from its effects upon motivation.

Non-accountable effects

Public expenditure also has effects that are not reflected in conventional measures of economic growth because they do not involve increases in measurable output. Social expenditure and spending on health and education, in particular, generate welfare increases over and above those resulting from their effects on economic activity. No measures are available of the extent to which people benefit from reduced anxiety, better health or more enjoyable leisure - all of which are increases in economic welfare.

Net economic effect

On the other side of the account are the foregone benefits from the employment of the same resources in other ways - some of which might have been used to generate physical output.

The assessment of the balance of benefits gained and loss is the subject of cost-benefit analysis - which it would be impracticable to perform on other than a disaggregated case-by-case basis. Moreover, the absence of a consistence to measure aggregate welfare that (as demonstrated by Arrow's impossibility theorem) limits the feasibility of drawing such a balance

Under normal circumstances, private sector spending on government bonds is to some extent at the expense of spending on private sector bonds, with the consequence that some private-sector investment is "crowded out". To the extent that government bonds are used to finance consumption rather than investment, the total of the country's investment is diminished, leading in time to a loss of potential output. Crowding-out is seldom complete, however, but depends upon a range of factors including elasticities of demand for investment and for money . During a recession, crowding-out may to some extent be offset by "crowding-in" as government spending makes up for the deficiency in private sector spending, leading to a recovery of demand and an increase in private-sector investment. The balance between crowding out under particular circumstances is a matter of controversy .