GOVERNMENT SPENDING: PROCESS AND MEASUREMENT*

Abstract

AN EXAMINATION OF the major phases of the federal government spending process reveals that the economic impact of government spending may occur during any of the phases of the process. These phases are (1) granting of financial authorizations by the Congress, (2) placing of contracts with business firms, (3) production of goods and services, and (4) delivery of the items to the government and payment therefor. Under certain circumstances, the announcement effects of the newly granted obligational authority may cause an increase in private spending in advance of the placement of contracts or expenditure of funds. More usually, economic activity will be affected soon after the contracts are let, as private production gets under way. This production on government order will be recorded in the national income accounts as increases in gross private domestic investment (change in business inventories). Only as production is completed and finished items delivered to the government, will the transaction appear as a government purchase. The delivery will be treated simultaneously as a decrease in gross private domestic investment; no net effect will occur in the level of gross national product at this point. The contribution will have been made earlier, during the production period prior to the actual government expenditures. However, the mere granting of appropriations and the placement of contracts may have little effect on the level of production when resources are fully employed. Also, to the extent that government orders can be filled out of existing inventories, the effect on production may not occur until the depleted inventories are restocked. Despite these and other complications, the primary impact of government procurement on the level of economic activity usually occurs in advance of the actual government expenditure. Government spending for other than the acquisition of goods and services may approximate more closely, or even lead, the economic impact. This would ordinarily be true for transfer and interest pay-