Public Expenditure - Fiscal Policy, Public Finance | Public Finance - B Com PDF Download

Meaning of Public Expenditure:

Expenses incurred by the public authorities—central, state and local self- governments—are called public expenditure. Such expenditures are made for the maintenance of the governments as well as for the benefit of the society as whole.

There was a misbelief in the academic circles in the nineteenth century that public expenditures were wasteful. Public expen­ditures must be kept low as far as practicable. This conservative thinking died down in the twentieth century, especially after the Second World War.

As a modern state is termed a ‘welfare state’, the horizon of activities of the government has expanded in length and breadth. Now we can point out the reasons for enormous increase in public expenditure throughout the world even in the capitalist countries where laissez-faire principle operates. These are the following.

Causes of Increase in Public Expenditure:

(a) Size of the Country and Population:

We see an expansion of geographical area of almost all countries. Even in no-man’s land one finds the activities of the modern government.

Assuming a fixed size of a country, developing world has seen an enormous increase in population growth. Consequently, the expansion in adminis­trative activities of the government (like defence, police, and judiciary) has resulted in a growth of public expenditures in these areas.

(b) Defence Expenditure:

The tremen­dous growth of public expenditure can be attributed to threats of war. No great war has been conducted in the second half of the twentieth century. But the threats of war have not vanished; rather it looms large. Thus, mere sovereignty, demands a larger allocation of financial sources for defence preparedness.

(c) Welfare State:

The 19th century state was a ‘police state’ while, in 20th and 21st centuries modern state is a ‘welfare state’. Even in a capitalist framework, socialistic principles are not altogether discarded. Since socialistic principles are respected here, modern governments have come out openly for socio-economic uplift of the masses.

Various socio-economic programmes are undertaken to promote people’s welfare. Modern governments spend huge money for the purpose of economic development. It plays an active role in the production of goods and services. Such investment is financed by the government.

Besides development activities, welfare activities have grown tremendously. It spends money for providing various social security benefits. Social sectors like health, education, etc., receive a special treatment under the government patronage. It builds up not only social infrastructure but also economic infrastructure in the form of transport, electricity, etc.

Provision of all these require huge finance. Since a hefty sum is required for financing these activities, modern governments are the only providers of money. However, various welfare activities of the government are largely shaped and influenced by the political leaders (Ministers, MPs, and MLAs to have a political mileage, as well as by the bureaucrats (MPLAD)).

(d) Economic Development:

Modern government has a great role to play in shaping an economy. Private capitalists are utterly incapable of financing economic development of a country. This incapacity of the private sector has prompted modern governments to invest in various sectors so that economic development occurs.

Economic development is largely conditioned by the availability of economic infrastructure. Only by building up economic infrastructure, road, transport, electricity, etc., the structure of an economy can be made to improve. Obviously, for financing these activities, government spends money.

(e) Price Rise:

Increase in government expenditure is often ascribed to inflationary price rise.

Types of Public Expenditure:

Public expenditure may be classified into developmental and non-developmental expenditures. Former includes the expenditure incurred on social and community services, economic services, etc. Non-developmental expenditure includes expenditures made for administrative service, defence service, debt servicing, subsidies, etc.

Public expenditure is classified into revenue expenditure and capital expenditure. Revenue expenditure includes civil expenditure (e.g., general services, social and community services and economic services), defence expenditure, etc. On the other hand, capital expenditure comprises expenditures incurred on social and community develop­ment, economic development, defence, general services, etc.

Public expenditure may also be classified as plan expenditure and non-plan expen­diture.

Non-plan expenditure falls under two broad heads, viz., revenue expenditure and capital expenditure. The former comprises interest payments, defence expenditures, subsidies, pensions, other general services (like health, education), economic services (like agriculture, energy, industry, transport and communication, science, technology and environment, etc.)

Expenditures on agriculture, rural development, irrigation and flood control, energy, industry and mineral resources, etc., are included in plan expenditure.

Principles Governing Public Expenditure or Canons of Public Expenditure:

Rules or principles that govern the expenditure policy of the government are called canons of public expenditure. Fundamental principles of public spending determine the efficiency and propriety of the expenditure itself. While making its spending programme, government must follow these principles. These principles, in short, are called canons of public expenditure.

Findlay Shirras has laid down the following four canons of public expenditure:

• Canon of benefit
• Canon of economy
• Canon of sanction
• Canon of surplus

(i) Canon of Benefit:

According to this canon, public spending has to be made in such a way that it confers greatest social benefits. In other words, public expenditure must not be geared in such a way that it provides benefits to a particular group of the community. Thus, public expenditure is to be made in those directions where general benefits rather than specific benefits flow in.

However, often public expenditure is incurred for the benefit of a particular group (say, dalits, tribals). This sort of public expenditure does not violate canon of benefit. Any public expenditure for the development of a backward area does promote social interest.

(ii) Canon of Economy:

Economy does not mean miserliness. It refers to the avoidance of wasteful and extravagant expenditure. Public expenditure must be made in such a way that it becomes productive and efficient. Efficiency in public expenditure requires economy of expenditures. To enjoy the maximum aggregate benefit from any public spending programme, it is necessary that the canon of economy is observed.

An uneconomic expansion in public expenditure will result in scarcity of funds, the much-needed growth of the productive sectors will be hampered. This means lower social benefit. It is thus obvious that the canon of economy is not independent of the canon of benefit.

(iii) Canon of Sanction:

The canon of section, as suggested by Shirras, requires that public spending should not be made without any concurrence or sanction of an appropriate authority. Arbitrariness in public spending can be avoided only if spending is approved. Further, economy in public spending can never be ensured if it is not sanctioned.

(iv) Canon of Surplus:

This canon suggests the avoidance of deficit in public spending. Like individuals, saving is a virtue for the government. So the government must prepare its budget in such a way that government revenue exceeds government expenditure so as to create a surplus. It must not run deficit to cover its expenditure.

However, modern economists do not like to attach any importance to Shirras’ fourth canon— the canon of surplus. To them, deficit financing is the most effective means of financing economic programmes of the government.

Importance of Public Expenditure:

An old-fashioned dictum says that “The very best of all plans of finance is to spend little, and the best of all taxes is that which is least in amount.” No one today believes this philosophy. In the 1930s, J. M. Keynes emphasized the importance of public expenditure.

The modern state is described as the ‘welfare state’. As a result, the activities of the modern government have widened enormously. Modern governments are undertaking various social and economic activities, particularly in less developed countries (LDCs).

i. Economic Development:

Without government support and backing, a poor country cannot make huge investments to bring about a favourable change in the economic base of a country. That is why massive investments are made by the government in the development of basic and key industries, agriculture, consumable goods, etc.

Public expenditure has the expansionary effect on the growth of national income, employment opportunities, etc. Economic development also requires development of economic infrastructures. A developing country like India must undertake various projects, like road-bridge-dam construction, power plants, transport and communications, etc.

These social overhead capital or economic infrastructures are of crucial importance for accelerating the pace of economic development. It is to be remembered here that private investors are incapable of making such massive investments on the various infrastructural projects. It is imperative that the government undertakes such projects. Greater the public expenditure, higher is the level of economic development.

ii. Fiscal Policy Instrument:

Public expenditure is considered as an important tool of fiscal policy. Public expenditure creates and increases the scope of employment opportunities during depression. Thus, public expenditure can prevent periodic cyclical fluctuations. During depression, it is recommended that there should be more and more governmental expenditures on the ground that it creates jobs and incomes.

On the contrary, a cut-back in government’s expenditure is necessary when the economy faces the problem of inflation. That is why it is said that by manipulating public expenditure, cyclical fluctuations can be lessened greatly. In other words, variation of public expenditure is a part of the anti- cyclical fiscal policy.

It is to be kept in mind that it is not just the amount of public expenditure that is incurred which is of importance to the economy. What is equally, if not more, important is the purpose of such expenditure or the quality of expenditure. The quality of expenditure determines the adequacy and effectiveness of such expenditure. Excessive expenditures may cause inflation.

Moreover, if the government has to impose taxes at high rates there will be loss of incentives. So, it is necessary to avoid unnecessary expenditure as far as practicable, otherwise benefits of better economic development may not be reaped. As a fiscal policy instrument, it may be counter-productive.

iii. Redistribution of Income:

Public expenditure is used as a powerful fiscal instrument to bring about an equitable distribution of income and wealth. There are good much public expenditure that benefit poor income groups. By providing subsidies, free education and health care facilities to the poor people, government can improve the economic position of these people.

iv. Balanced Regional Growth:

Public expenditure can correct regional disparities. By diverting resources in backward regions, government can bring about all-round development there so as to compete with the advanced regions of the country.

This is what is required to maintain integration and unity among people of all the regions. Unbalanced regional growth encourages disintegrating forces to rise. Public expenditure is an antidote for these reactionary elements.

Thus, public expenditure has both economic and social objectives. It is necessary to ensure that the government’s expenditure is made solely in the public interest and does not serve any individual’s interest or that of any political party or a group of persons.