Inmost economies government revenues come mainly from direct taxes on personal incomes and company profits as well as indirect taxes levied on purchase of goods and services such as value added tax (VAT) and sales tax. Since state provision of retirement pensions is included in government expenditure, pension contributions to state-run social security funds are included in revenue too. Some small component of government spending is financed through government borrowing.
Government spending comprises spending on goods and services and transfer payments.
Governments mostly pay for public goods. Clean air, national defense, health services are examples of public goods. Governments also provide such services as police fire fighting and the administration of justice.
A transfer is a payment, usually by the government for which no corresponding service is provided in return. Examples are social security, retirement pensions, and unemployment benefits and, in some countries, food stamps. In most countries there are campaigns for cutting government spending. The reason for it is that high levels of government spending are believed to exhaust resources that can used productively in the private sector. Lower incentives to work are also believed to result from social security payments and unemployment benefits.
