CHAPTER 3

GOVERNMENT EXPENDITURE
Introduction

Government expenditure is that expenditure, which is spent for the fulfillment of community
needs of citizens or to improve their economic and social welfare. These days the amount of
government expenditure is increasing in almost all countries. Its reason is that the works of
government and other local bodies are continuously increasing on different areas and fields. The
principle of government expenditure was not considered impotent in 19th century because the
area of works of government was very limited, but in 20th century the works of state have
expanded in the area of social matters like education and public health and commercial and
industrial matters like—railway irrigation, electricity and other plans, therefore government
expenditure has increased due to this. Due to nature and amount of government expenditure and
for this reason that it affects economic life of country in many types, its importance has been
increased. For example, government expenditure affects general level of economic activities and
level of production and distribution.

Causes for the Increase in Government Expenditure:

One of the most important features of the present century is the phenomenal growth of public
expenditure. Some of the important reasons for the growth of public expenditure are the
following.

1. Welfare state: welfare state is the form of government in which the state protects and
promotes the economics of the citizen.

2. Defense expenditure: Modern warfare is very expensive. Wars and possibilities of wars
have forced the nation to be always equipped with arms. This causes great amount of
public expenditure.

3. Growth of democracy: The form of democratic government is highly expensive. The

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 conduct of elections, maintenance of democratic institutions like legislatures etc. cause
great expenditure.

4. Growth of population: is an undesirable condition where the number of existing human

population exceeds the carrying capacity of earth.

5. Rise in price level: Rises in prices have considerably enhanced public expenditure in
recent years. Higher prices mean higher spending on the part of the govt. on items like
payment of salaries, purchase of goods and services and so on.

6. Development expenditure: for implementing developmental programs like Five Year

Plans, Modern governments are incurring huge expenditure.

7. Public debt: Along with debt rises the problem like payment of interest and repayment of
the principal amount. This results in an increase in public expenditure.

8. Poverty alleviation programs: As poverty ratio is high, huge amount of expenditure is

required for implementing alleviation programmes.

Classification of Government Expenditure:

Government expenditure has been classified in to Revenue expenditure and Capital

expenditure. Revenue expenditure is current expenditure. For example, it includes
administrative expenditure and maintenance expenditure. This expenditure is of a
recurring type. Capital expenditure is of capital nature and is incurred once for all. It is
non-recurring expenditure. For example, expenditure in building, multi- purpose projects or
on setting up big factories like steel plants, money spent on land, machinery and equipment.

CANONS OF PUBLIC EXPENDITURE

The canons or principles of public expenditure are the fundamental rules which govern the
public expenditure policy of the governments. The method and direction in which the public

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expenditure utilized is of paramount importance.

Cannon of Benefit

The main motive of this principle is to achieve maximum social welfare, which means the
strategy of public expense should be done in such a way that it will be profitable (as a whole) For
the society and no for a particular sector of the society.

Canon of Economy

This implies that the state should be economical in spending money. It should not spend more
than the necessary amount on items of expenditure. The sole aim is to avoid extravagance and
corruption.

Canon of Sanction
According to this canon, no expenditure should be incurred without the proper approval of the
sanctioning authority. It also implies that the spending authorities should spend the amount for
which it has been sanctioned and to see that the sanctioned amount is properly utilized. Public
accounts are to be audited at the end of financial year.

Canon of Surplus

This canon believes in the avoidance of deficit in public expenditure. Modern governments does
not consider balanced budget a virtue always. In an inflationary condition a surplus budget is
desirable as it reduces purchasing power of the individuals. Similarly, in the time of depression
a deficit budget is recommended in order to enhance the purchasing power of the people. The
canon of surplus is not relevant in modern public finance.

Canon of Productivity
Public expenditure should promote production and increase the working efficiency of the
people. Major part of public expenditure should be incurred on developmental activities. The
aim of public expenditure should be maximum production, employment and income.

Canon of Elasticity

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There should be flexibility in government expenditure. That is, the government may be able to
change its public expenditure policy with changing conditions. It means that public
expenditure should increase during periods of emergency and reduce during normalcy.

Canon of Equality

This implies that public expenditure should be incurred in such a way that inequality in the
distribution of income should be reduced. For achieving this canon the benefit of public
expenditure should conferred more on the poorer section of the society.

Canon of Neutrality

Public expenditure should not worsen the production-distribution-exchange relationship

instead of improving it. Public expenditure should result in increased production and
productivity, reduced inequality of income and wealth and increased economic activity and
exchange relationship.

Canon of Certainty
The public authorities should clearly know the purposes and extent of public expenditure to be
incurred. This canon explains the preparation of public budgets.

DEPRESSION AND GOVERNMENT EXPENDITURE

As it has already been told, depression is that condition of economy in which saving are more
than Investments. Their result that its total aggregate effective demand reduces so prices
comes down. By falling prices businessman and manufactures incur loss and they reduce their
faith to invest in future.

Its result is that they reduce the production and employment also reduces. In this way worker,
labors And major numbers of staffs are to be retrenched. Its result is the consumption of
unemployed labors and staff reduces.

DIFFERENCE BETWEEN PRIVATE AND GOVERNMENT EXPENDITURE

The problem areas of private and public expenditures are normally same. Both try to establish
a balance between income and expenditure. On both the same economy rules applies in

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general. In both the situations. The same financial policy is applied but some fundamental
differences between both, which are as follows:

1. Adjustment between income and expenditure – State first decides the quantity of
expenditure and only after that tries to achieve its income, on the other hand private
expenditure normally depends on the individual income and generally every person spends
according to his income. In the words of Dalton, “A person decides his expenditure according
to his income whereas a Public sector decides its income according to its expenditure.”

2. Difference of elasticity – There is no elasticity in public expenditure an increase in the

public expenditure can be easily done, but it is difficult to lessen. On the other hand elasticity
on be easily find out in private expenditure as deficit and increment are the two factors of this
expenditure.

3. Difference of scope – The area of public expenditure is wide because the working area of
public sector is quite vast whereas the area of private expenditure is limited as the working
area of every individual is also limited.

4. Willingness of expenditure – Public expenditure is not optional. It is essential to spend

government income on social welfare but private expenditure is based on one’s wish. There in
no such priority on this private expenditure.

5. Direct Benefit – There is no direct benefit in public expenditure like, famine, war etc.
while government spends on these no such direst benefit takes place. Where as an individual
gets direct benefit from every expenditure.

6. Object – The objective of public expenditure is social welfare and private expenditure is
social welfare.

7. Control – Parliament controls the public expenditure and an individual controls by the
particular person.

8. Economy – During public expenditure economy is not the important priority but in Private
expenditure it means a lot.

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9. Effects – Public expenditure effects on the whole society or nation but in private
expenditure effectors lies on a particular person.

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