Canons of Public Expenditure | Economics Optional Notes for UPSC PDF Download

Canon of Benefit

• According to Prof. Findlay Shirras public expenditure should bring with it important social advantages such as increased production, equitable distribution, social justice and maximum social welfare.
• Canon of Benefit is the fundamental canons of public spending. Ac­cording to this canon public money should be spent so as to pro­mote Maximum Social Advantage (MSA). Every expenditure should be directed to achieve maximum social advantage to the commu­nity.
• Benefits from public expenditure may be identified with achieve­ment of proper allocation of economic resources, proper distribution of income and wealth in society and stability of price level and growth of economy.
• According to this principle “public expenditure in every direction must be carried just so far, that the advantage to the com­munity of a further small increase in any direction is just counter balanced by the disadvantage of a corresponding small increase in taxation or in receipts from any other source of public income”.
• This canon implies that public expenditure should be planned in such a way as to yield maximum social advantage and social welfare to the community as a whole and not to a particular group of the commu­nity.

Canon of Economy

• According to Findlay Shirras canon of economy should be observed in public expenditure. Economy does not mean stinginess, but avoid­ance of waste and extravagance. Limited revenue resources should be used in a productive manner.
• Duplication of expenditure and over­lapping of authorities should be avoided. The money spend should result in the creation of productive powers of the society.
• Canon of economy also implies that government expenditure should not gen­erate any adverse effect on production. Shirras, in this context ob­served that “economy means protecting the interests of the tax payer and not merely in effecting economies in expenditure but in develop­ing revenue”.

Canon of Sanction

• Canon of sanction has considerable significance in a democratic government. This canon requires that the public authorities should spend money, only after obtaining prior sanction from the concerned authority for the specified purpose. This is done as a safeguard against the possibility of unwise and reckless expenditure.
• Experi­ence has taught the people that all unauthorized spending leads to extravagance and overspending. Without proper sanction there is the danger of misappropriation of funds and possibility of unneces­sary spending of public money on the part of highly placed govern­ment employees.
• The canon of sanction also requires the spending authorities to spend the amount on the purpose for which it has been sanctioned. There should be systematic auditing and inspection pro­cedures at the end of financial years to ensure accountability on the part of government officials vested with the power to expense.

Canon of Surplus

• The government should always aim at a surplus of income over ex­penditure. Shirras observes “public authorities must earn their living and pave their way like ordinary citizens”. Government must live within his means. It should not always overspend and run into permanent deficits years after years.
• If possible the expenditure should be kept less than the earnings of government. The surplus thus gen­erated can be used when there is unavoidable deficit. Surplus can be generated either by controlling public expenditure or by increas­ing current revenue.
• However recently there occurred a rethinking about the budgetary policy. It is widely accepted that to fight depres­sion and to achieve price stability and economic growth, deficit fi­nancing is imperative.
• Hence a choice of surplus or deficit budget is decided by the merit of the case. However this canon is an important reminder of the fact that the government should not overspend and run into huge debts. It also clearly gives the indication that deficit spending should be avoided as far as possible.

Canon of Elasticity

• This canon requires that the rules governing the expenditure policy of the government should not be rigid. It should be allowed to vary according to needs and circumstances. The expenditure policy should be elastic, rather than rigid in character.
• There should be enough scope for change in expenditure policy, according to time and re­quirement. Government should be able to increase public expendi­ture during periods of economic emergency and to decrease during periods of normalcy.
• Even though it is easy to increase expenditure during periods of crisis, it is a difficult process to bring down the volume of expenditure. For example, when an economy suffers from unemployment and deficiency of demand, the government should be capable of spending more to overcome this situation.
• Under such a situation, government should go for a deficit budget, and inject addi­tional purchasing power into the economy, to increase effective de­mand and to generate more employment opportunities. In this con­text rigidity in spending will not help to overcome a crisis situation. Flexibility of expenditure should be provided under such circum­stances.

Canon of Neutrality

• Canon of neutrality implies that public expenditure should have no adverse effect on production and distribution activities of the economy. Public expenditure should only result in increased production, re­duced inequality of income and wealth and increased economic ac­tivity.
• The spending activities of the government should always be directed to produce desirable effects and to avoid undesirable effect upon the economy. Public expenditure should only help to improve the production-distribution-exchange relationship in the economy.

Canon of Productivity

• This canon implies that, expenditure policy of the government should encourage production and productive efficiency of the economy. Public expenditure should be always directed towards enhancing the pro­ductive capacity of the economy.
• Major part of public expenditure should be allocated for productive and development purposes. This will help to raise level of employment, income, effective demand etc. of the economy. The goal of public expenditure should be to maxi­mize higher incomes.

Canon of Equitable Distribution

• According to this canon, public expenditure should be incurred in such a way that the glaring inequalities in the distribution of income and Wealth are minimized. The expenditure pattern of the govern­ment should be so designed to benefit the poorer sections of the community.
• Expenditure programmes should be ordained to provide more educational facilities, medical benefits, cheap housing facili­ties, old age pension and other social security measures to the vulnerable sections of the community. For achieving this canon, public expenditure should be planned according to specific programmes and prioritized as per the availability of funds.
• A modern welfare state should incorporate all the canons of public expenditure. However the principle of maximum social advan­tage is the most fundamental canon of public expenditure. The other canons or principles are simple administrative rules which should guide the authorities, in the way of spending public funds, entrusted to them.