Government spending refers to expenditure by the government on the purchase of goods and services using public funds. In macroeconomic models like aggregate demand (AD), it excludes transfer payments, which do not involve production.

• Current spending (also called recurrent or consumption spending): Covers day-to-day running costs of government operations and provision of public services.
  • Examples include wages and salaries for public sector employees, administrative expenses, and purchases of goods and materials.
• Capital spending: Involves investment in long-term physical assets such as infrastructure, buildings, roads, and equipment.
  • This enhances the economy’s productive capacity, supports job creation, and builds assets for future public service delivery.

Transfer payments are separate from government spending in GDP calculations. They involve direct payments to individuals or households without any goods or services in exchange.

• Examples: unemployment benefits, pensions, child benefits, and subsidies.
• These aim to redistribute income, reduce poverty, and provide a social safety net.