If people spend money it creates income for others and more jobs. If they stop spending, jobs can be lost.
Governments try to make sure that people only spend as much as their country earns. In New Zealand the Reserve Bank controls the amount of money people can spend by raising or lowering the interest rate on loans it makes to banks – banks pass raised costs on to their customers and people pay more for credit and have less to spend.
The government records what people spend on things like food or housing, and how much money is spent on investments like new roads or new homes – this is important because investment makes the economy grow.
The ‘Great Depression’
In the 1920s there was a crisis in the whole world economy. People lost their jobs and had no money to spend, and this meant that businesses had to stop making products and then had to lay off staff. New Zealand exports fell by 37% between 1929 and 1931, and the number of workers with no jobs reached as high as 15% of the workforce.
British economist John Maynard Keynes suggested that during depressions governments should spend public money on roads or railways or other public works, so people have jobs and can begin spending money again.
The New Zealand government used his ideas and they seemed to work, until a big rise in the price of imported oil in 1973. Money was invested in public works, but the number of people out of work rose, and so did inflation – the dollar didn’t buy as much as it had before.
During the 1980s the government changed the tax system. They reduced taxes on imports, and businesses did not need licences to import goods any more. People were allowed to borrow much more money. Shops could be open for longer hours each day, and also on the weekends. People began to spend much more money.
People have often suggested that the government should spend less money and lower the amount of taxes people pay. But poorer people cannot afford to pay the full cost for things like education and health, so the government has used tax money to provide these.