Government spending

The theoretical upper limit of government spending is the entire GDP of the nation.  This is what happens in command economies.


One Response to “Government spending”

  1. Indian Investor Says:

    Suppose you look at the financial status of a country in terms of its external financial transactions – exports result in forex inflows, imports result in forex outflows, there’re reserves in forex and there would be external debt. Add in the inflows and outflows of capital on the capital account. An ordinary person’s finances can be studied through income, expenses, savings and debt. You can also study the finances of a country through the above flows.
    Since the sovereign can enforce settlement of transactions within its territories through legal tender currency; the theoretical upper limit on government spending is the level that’s tolerable while still ensuring solvency of the country from an external finance perspective.
    Excessive government spending resulting in higher imports, high reliance on external debt, etc are situations that lead to a balance of payments crisis.
    To make a short point of it, if the Government of India wants to stimulate development through spending on useful public works, they need to correspondingly limit imports of oil, etc. Or else you get a 1991-style balance of payments crisis, also called a currency crisis. That’s what Zimbabwe, Iceland, South Korea, etc went through recently – the bubble burst triggered an external finance solvency problem that caused their currency to collapse.

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