Autonomous Expenditures

The component of an economy's aggregate expenditure unaffected by actual income level. 

Author: Patrick Curtis
Patrick Curtis
Patrick Curtis
Private Equity | Investment Banking

Prior to becoming our CEO & Founder at Wall Street Oasis, Patrick spent three years as a Private Equity Associate for Tailwind Capital in New York and two years as an Investment Banking Analyst at Rothschild.

Patrick has an MBA in Entrepreneurial Management from The Wharton School and a BA in Economics from Williams College.

Reviewed By: Josh Pupkin
Josh Pupkin
Josh Pupkin
Private Equity | Investment Banking

Josh has extensive experience private equity, business development, and investment banking. Josh started his career working as an investment banking analyst for Barclays before transitioning to a private equity role Neuberger Berman. Currently, Josh is an Associate in the Strategic Finance Group of Accordion Partners, a management consulting firm which advises on, executes, and implements value creation initiatives and 100 day plans for Private Equity-backed companies and their financial sponsors.

Josh graduated Magna Cum Laude from the University of Maryland, College Park with a Bachelor of Science in Finance and is currently an MBA candidate at Duke University Fuqua School of Business with a concentration in Corporate Strategy.

Last Updated:December 4, 2023

What are Autonomous Expenditures?

This refers to the component of an economy's aggregate Expenditure unaffected by actual income level. This type of spending is necessary and autonomous regardless of whether it is a government-driven or an individual expenditure.

The concept in economics refers to spending that is not influenced by income level. That is, a rise or drop in income does not cause an increase or a decrease in Expenditure. This consumption is seen as routine and integral.

In classical economics, a rise in such expenditures is generally said to be accompanied by an increase in aggregate output, like Gross Domestic Product (GDP).

Autonomous spending refers to expenditures that must be made, regardless of income. It is the minimum amount of money a person or a government needs to live on when there is no income.

Most government spending falls under this category. This is because some expenditures directly relate to the efficient running of a nation, while another spending is needed to maintain minimum standards.

Understanding Autonomous Expenditure

Autonomous expenditure obligations must be met regardless of whether an individual earns an income. Since the need does not change with income, it is considered independent.

These expenses are often related to an ability to maintain a state of autonomy.

In the context of nations, autonomy refers to the ability to self-govern. It also refers to the power of an individual to operate at a certain acceptable level of independence within society.

To qualify as self-supporting, such expenditures must be perceived as necessary to maintain a base level of function or, more specifically, to ensure individual survival.

It is common for these expenses to remain constant regardless of income level.

Autonomous consumption is tied to independent Expenditure, including all the financial obligations required to maintain a basic standard of living.

In addition to these costs, all additional expenses are part of induced consumption, dependent on the changes in disposable income.

If a person's income is insufficient to cover autonomous expenses, they must still find a way to pay for them. 

It is common for people to save their own money, borrow using consumer borrowing mechanisms such as loans and credit cards, or use various public services to meet their needs.

Expenditure Categories

Expenditures can be divided into the following categories.

  • The term "autonomous expenditures" refers to expenditures that a government is necessitated and obligated to undertake, regardless of whether an economy is experiencing prosperity.
  • Most government spending is considered autonomous because it is essential to running a country.
  • There is a link between autonomous expenditures and autonomous consumption since self-governing spending is necessary to maintain a basic standard of living.
  • External factors can affect self-governing expenditures, including interest rates and trade policies.

Although the obligations that qualify as self-governing expenditures remain the same, the income level varies.

The need for food, for example, is considered a rational expenditure from an individual point of view even though the condition can be met in various ways, like using food stamps, eating every meal at a five-star restaurant, or using the services of a personal chef.

Although income levels affect how needs are met, the requirements do not vary.

Autonomous Expenditure And Consumption

Autonomous consumption is the portion of the household's spending independent of the household's regular income.

They are forced to borrow or use their savings to cover their living expenses without a stable income stream.

This is because they are financing life-sustaining activities or items they must pay for and maintain first and foremost. If this were not the case, there would be no need for planning or delaying payments.

Citizens from all classes of society or income brackets have basic needs and utility bills that they must account for. However, these needs and the amount payable vary from person to person. 

Despite income voids, each household must find a way to meet their basic needs and pay their bills. Such expenditures are referred to as autonomous expenditures. 

There is a possibility that the characteristics and components of this type of spending may change because of changes in the amount and rate of cash inflows, savings, or credit availability.

People may choose to downsize their homes and lower their utility bills when their income is drastically reduced, and no savings are left.

Several factors contribute to its growth, such as the potential for future cash inflows, the ease of borrowing, the size of the asset base, and the amount of savings.

This phenomenon is connected to a country's gross domestic product (GDP). Various studies have suggested a positive effect of GDP growth on residential investment.

According to Wells (1985, 1986), as a nation's GDP increases, the proportion of the construction industry in GDP will increase, and the ratio will change more rapidly when it crosses into the middle-income territory.

The notion of autonomy also makes sense when we look at the tendency to reduce corporate spending during periods of deflation. Consequently, autonomous consumption will decrease, shifting the aggregate demand curve.

To counteract the decline in autonomous spending, the government introduces an economic stimulus package and other measures that stimulate the economy.

Consumption of this kind is always contrasted with induced consumption and discretionary consumption.

Consumption that varies as a function of disposable income can be described as induced consumption.

Factors Affecting Autonomous Expenditures

Technically, self-governed expenditures cannot be influenced by external factors. However, several factors can influence this type of Expenditure. 

For instance, interest rates can significantly influence consumption within an economy.

When interest rates are high, consumption is dampened, and consumption is sparked if interest rates are low. Therefore, the level of Expenditure within a particular economy can be affected in this manner.

Furthermore, trade policies between countries can significantly impact self-governing expenditures made by their citizens.

If a producer of cheap goods imposed duties on exports, the effect would make the finished product more expensive for outside geographies.

Taxes are another means by which governments can restrict an individual's self-determining expenditures. For example, a basic household good may be taxed, and there are no substitutes for it, thus reducing the self-controlled spending associated with it.

One of the essential factors in determining an individual's autonomous Expenditure is how much money they have saved. Because self-governing spending is inevitable, individuals should grow their savings to minimize these expenses.

It is equally important to understand the extent to which one has the capacity and strength to spend money wisely.

1. Borrowings

One of the most challenging situations occurs when an individual takes a loan to meet their basic needs. As soon as the loans are taken, the creditor adds an interest cost to the loan, making it more expensive for the individual.

Given this, borrowing is considered one of the critical factors that may affect self-governing expenditures.

2. Government Factors

Moreover, the government's role in determining such Expenditure is also crucial.

At a national level, governments put a lot of effort into making the nation function better, such as repairing roads, building bridges, constructing metro, and train facilities, etc.

Although this Expenditure can be considered wasteful, it is a necessity for most people and is therefore viewed as an autonomous expenditure. 

3. Trade Policies

In addition to internal factors, some external factors contribute to such expenditures. For instance, many nations have different tax policies.

Furthermore, to participate in nation-building, one must deal with foreign exchange to get a decent return on their investment. Therefore, to correctly calculate autonomous expenditures, it is necessary to consider trade policy.

Examples of Autonomous Expenditure

Some examples are:

1. Government Expenditure

The taxes we pay to live a peaceful, uninterrupted life are used for government expenditure. Over the years, the government has levied several taxes, such as minimum income, property, road, water, and others.

Considering that the government is also trying to make the life of its citizens as easy as possible, money must be allocated to ensure that all services a nation should be able to enjoy are available to us. 

The services include metro or train services, public restrooms, highways, expressways, etc.

2. Basic Needs for a Living

Expenditures made to acquire food and housing represent one of the most important examples of autonomous Expenditure, which is done for one's survival.

We all want to eat well and live a good life for our children; however, these things are not readily achievable. Individuals must work hard to provide their families with basic needs such as food, shelter, and education.

Again, this type of Expenditure is autonomous since it is independent of an individual's income.

To understand better, let us take another example:

Tom had a good job with a decent salary. He lived in a small apartment that he rented. His disposable income allowed him to pay for all his necessities on time, such as food, rent, utilities, healthcare, and non-essential goods and services.

Due to the financial crisis, his company downsized, and he lost his job. Unfortunately, he was unable to find a new job quickly. As a result, he canceled all his vacation plans and stopped spending on other discretionary expenses such as eating in restaurants and shopping sprees.

To reduce the amount of money spent on non-essential goods and services, he prioritized spending on things that couldn't be avoided. In the absence of cash inflows, he was able to pay for necessities by using both his savings and borrowed funds. 

After three months, he eventually found a suitable job and reverted to his previous way of living.

Autonomous Expenditures Importance

Individual or autonomous governmental expenditures are mandatory expenditures in an economy. An individual's or a country's real income has no bearing on autonomous expenditures.

According to classical economic theory, the aggregate output of an economy is affected by autonomous spending. Consequently, the growth or decline of such Expenditure does not affect aggregate production.

It does not matter whether income is positive or negative -- autonomous Expenditure does not change. An example of autonomous spending for an individual would be food purchases, house costs, utility bills, etc.

When income level declines, the amount of income directed towards autonomous expenditures might be adjusted.  

Individuals may, for example, reduce or alter their food consumption, live in smaller apartments, and pay lower utility rates, but cannot avoid these expenses altogether.

The need for living remains the same regardless of changes in income level, even if expenses and the means of paying the difference. Autonomous expenditures contribute to self-governance and the ability of the government to meet its basic needs.

People, for example, can't survive without food and shelter. As they cannot live without these essentials, they are autonomous. Therefore, in addition to essential expenditures, discretionary expenditures are also deemed non-essential.

Expenditures and autonomous consumption are closely related since both are concerned with the amounts of consumption that is mandatory or necessary for individual consumption.

The level of income does not affect these needs. It is widely believed that many government expenditures are mandatory or autonomous. Examples include good health care, an efficient road network, and others.

There is a strong connection between the government's autonomy on the one hand and the government's Expenditure. But on the other hand, they contribute immensely to how well a country can meet its basic needs. 

Researched and authored by Saif Ali | LinkedIn 

Reviewed and Edited by Parul Gupta | LinkedIn

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