Government spending is any money spent by the government (not to be confused with taxation in the circular flow of money). Government spending can be effected by any form of government funded operations, including health, social services, unemployment packages, government payouts to banks and national defence.
Government spending is a part of fiscal policy and is used by the government to prevent the rather more pernicious side-effects of the business cycle. If, for example, the economy is experiencing a recessionary gap, the government could help by increasing government spending. This increase in government spending would help the Economy grow because that same extra money will be passed onto consumers and will lead to investment, thus helping the Economy out of recession.