PUBLIC EXPENDITURE

Q7) What is public expenditure? Bring out the types of and causes of growth
in public expenditure.

Public expenditure is the expenditure incurred by public authorities for

conferring collective benefits on the society and for promoting economic and
social welfare. This important aspect of public finance got its due recognition
only in the later part of 10th century with the public opinion in Germany going
against the policy of limited or non-interference by the government. The
Keynesian revolution accompanied with increasing state activities has made
this aspect as an indispensable part of public finance.

Principles Or Canons Of Public Expenditure-

1) Principle of maximum social benefit – The public expenditure should be

designed in such a manner that every rupee spent by the government
must have as its aim the promotion of the maximum welfare of the
society as a whole. A proper balancing of social benefit and social cost
should be considered.
2) Canon of Economy – This principle ensures that there is no wastage of
resources and there is proper utilisation of tax payers’ money. Further, it
calls for no duplication of expenditure and overlapping of authorities. It
should not discourage age saving.
3) Canon of Sanction – Expenditure cannot be incurred without sanction
from a competent authority. In order to control misappropriation of
money, the sanctioned expenditure should be audited on a periodic
basis.
4) Canon of Elasticity – The scheme of expenditure should be adjusted as
per the needs of the time in the economy.
5) Canon of Surplus – Public expenditure should be adjusted in such a way
that it can be covered by the collected revenues, so that a surplus is left
at the end of the year.
 6) No adverse effects on Production or Distribution – Public expenditure
should stimulate productive activities and it should be able to bring
equality by raising the standard of living.
7) Promotion of economic growth and stability – Expenditure should
promote growth and economic stability by controlling business
fluctuations, should provide employment opportunities. Further, it
should be able to promote social growth by providing for defence
against external aggression and maintaining internal law and order.

TYPES OF CLASSIFICATION OF PUBLIC EXPENDITURE

1) Revenue and Capital expenditure- Revenue expenditure is also called

current or consumption expenditure. It recurs every year. This is
expenditure incurred on civil administration (eg. Police, jail, judiciary)
and maintenance.
Capital expenditure is non-recurring type and includes expenditure
incurred on building multipurpose projects or on setting big factories or
on buying machineries and equipments etc.
2) Transfer and non-transfer payments – Transfer payments refer to those
kinds of expenditure against which there is no corresponding transfer or
real resources (i.e goods and services) to the government. These include
expenditure on pensions, unemployment allowance, sickness benefits,
interest on public debt etc. In this type, the government does not get
any direct benefit during this period.
Expenditure incurred on buying goods and services is known as non –
transfer payments. This type includes expenditure on defence,
education, health sector etc.
3) Developmental and non-developmental expenditure- Developmental
expenditure includes expenditure on irrigation projects, transport and
communication, agricultural and industrial development, education and
research etc. This expenditure promotes growth and development in the
economy.
Expenditure on defence, law and order etc. are regarded as non-
developmental expenditure.
The Union Government of India has adopted a new classification of
public expenditure from 1987-88 budget. Under this new classification,
public expenditure is classifies into two types:-
1) Non-plan expenditure divided into revenue expenditure(interest
payments, defence revenue, major subsidies, socioeconomic services,
grants to states and union territories etc. ) and capital
expenditure(loans to states and ut’s, loans to foreign governments).
2) Plan Expenditure to finance a) central plans such as agriculture, rural
development, irrigation and flood control, science and technology,
social services etc. b) Central assistance for plans of states and UT’s.

CAUSES OF GROWTH IN PUBLIC EXPENDITURE-

Adolf Wagner, a german economist had found that increase in state

activities had led to the increase in public expenditure during latter part
of 19th century. Economists like Peacock and Wiseman who studied the
pattern of government expenditure in UK during 1891 and 1955 had
come to the conclusion that due to social disturbances, both the
expenditure and taxing pattern has changed.

Following are the causes of growth in expenditure-

1) Increase in National Wealth fuelled by the sectoral development in

the economy has led to the increase in public expenditure.
2) Increase in per-capita income has influenced the consumption and
demand pattern of the people thereby increasing the expenditure.
3) Growth in state functions has also led to increase in expenditure.
Modern governments have increased their role by investing in law
and order or internal security, a welfare oriented approach as well.
Thus with maintenance of law and order and protecting countries
from external aggression leads to an increase in developmental
activities which ultimately increases the expenditure.
4) Spread of urbanization and increase in population also necessitates
growth in public expenditure.
5) Technological changes also have led to a growth in public
expenditure.
6) Socialistic tendencies have resulted in expansion in the public sector.
7) Democratic political set up and changing social views and economic
requirements have led to a great expansion in expenditure.
8) Increase in transfer expenditure or payments in the form of providing
various social security schemes, pensions, provident fund schemes
etc. have increased the volume of expenditure. Further, expenditure
also increases because of employment generating anti-poverty
schemes.

Q) Describe the effects of public expenditure on various economic

activities.

A) Public expenditure, unlike taxation, has a positive impact on people

especially psychologically. The overall effects of public expenditure can
be studied as follows:

1) Effects on Production:-

Most of the public expenditure is productive directly or indirectly (for

eg. Non-developmental expenditure). The effects on production can be
analysed in the following ways-

a) Ability to work – The community’s productive efficiency or ability or

power to work, save and invest increases generally with the socially
desirable public expenditure.
b) Desire to work – The nature of public expenditure is such that it
should not kill the will or desire to work or save. The granting of
pensions, insurance against sickness and unemployment allowance
etc. may make people indifferent towards the future and make them
neglect savings. This affects the present productivity. Hence, such
expenditure should be under a limit.
c) Diversion of resources – Public expenditure may have a beneficial
impact on production through diverting resources between
employment and localities and present needs and future
requirements. Through the system of bounties and subsidies,
agovern