What Are Direct Expenditure Offsets?

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The government uses discretionary spending and changes in tax rates to try to reduce unemployment, spur sustainable economic growth and maintain stable prices for goods or service. As government spending represents only one facet of a complex system, changes in how other players in the system behave impact the effect of government expenditures.

Direct Expenditure Offsets

  • As the government spends more money, private sector businesses typically spend less. For example, if government invests in infrastructure to support the Internet, major Internet service providers reduce their infrastructure investments. The reduction in private sector spending diminishes the value of the government investment and renders it partially or entirely moot. If the ISPs cut their investment to equal the government spending, the government expenditures yield no benefit. If they only cut their spending by 50 percent, government expenditures yield some benefit but less than intended.

Considerations

  • Unlike monetary policy, which the Federal Reserve controls, direct expenditures need approval from Congress. As Congress often moves slowly compared to economic conditions, changes in direct expenditures experience time lags that can render the investments unnecessary or even counterproductive by the time they go into effect. Returning to the Internet infrastructure example, if the government decides to invest to bolster tech sector activity during a low period, the tech sector might be in an upswing by the time the investments go into effect. The ISPs might choose not to invest in infrastructure even though they are financially positioned to make those investments, in which case the government expenditure will prove counterproductive.

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