The growth of the public sector outlined in Module 2 indicates that the government in most Western industrial countries must be a significant purchaser of goods and services from the private sector. Part of these purchases results in the direct employment of labour in the production of government services such as education, defence, and law and order. The government as a producer is the subject of Module 7. In this Module you will study the control exercised by the government over the economy through its purchases from private sector firms.
Purchasing by governments and other public bodies in the EC accounts for about 15 per cent of its gross domestic product. In the case of the UK, the government is the largest single buyer of British industrial products and in recent years has purchased about 45 per cent of the output of the aerospace industry, 20 per cent of the electronics industry and 30 per cent of the shipbuilding industry. Latterly, EC governments have become major purchasers of Information Technology services and equipment.
The purpose of this module is to explain what actually goes on in the government-industry interface and to throw some light on the problems encountered by government in trying to promote its policy objectives through attempts to influence the behaviourof firms. This calls for an examination of the market environment in which purchasing policies are carried out, the analysis of the effects of government purchasing arrangements on both the behaviour of government purchasers (the ‘ principal’) and of the suppliers (the ‘agents’) and the consequences of their behaviour for the operation of government policies.
Although a large proportion of government expenditure represents payment to those who work within government, i.e. government employees and retired employees, direct purchases from firms can be considerable. In the case of defence expenditure, for example, equipment procurement in the UK represents about 46 per cent of total expenditure. Of that 46 per cent, 34 per cent represented production of weapons and repair work, and 12 per cent research and development expenditure.
