MEANING AND NATURE OF PUBLIC EXPENDITURE: Follow Book

Classification of Public Expenditure

1. Accounting Classification: Accounting classification of public expenditure has been around
for centuries to help the government control spending and prevent misuse. It can be based on
departments or types of expenses. While it aids auditing and preventing misuse, it doesn't
provide insights into the impact or effectiveness of spending. Distinguishing between mandatory
and optional spending shows limitations but doesn't fully reveal the effects of different spending
policies. Nowadays, people recognize the need for classifications that offer policy insights. There
are various classifications in use, with some still evolving (like gender budgeting). We'll discuss
two classifications that indicate possible economic effects.
2. Productive & Unproductive Expenditures: The distinction between productive and
unproductive expenditures highlights that some expenses contribute to the economy's growth,
while others are more consumption-oriented. In classical thought, only public expenditures
creating tangible assets were deemed productive. However, this approach overlooks the
government's integral role in the economy. Productivity depends on asset quality, allocation, and
utilization. Some assets, even if not income-yielding, contribute to overall productivity, like
infrastructure and human development. Productive power also resides in education, research,
health, and living conditions. The classification of public expenditure as productive or not isn't
straightforward due to the complexity of factors involved. The distinction between these
categories isn't precise.
3. Transfer & Non-Transfer Expenditures: Pigou's classification distinguishes between
transfer and non-transfer expenditures. Transfer expenditures involve payments by the
government without receiving goods/services in return, such as pensions or benefits. These funds
are transferred to recipients without acquiring corresponding goods/services. Non-transfer
expenditures refer to payments made by the government for goods/services it uses or purchases.
The government can impose conditions on the use of transfer payments. It's important to note
that government purchase prices might differ from market rates.

Canons of Expenditure
1. Canon of Economy: The canon of economy emphasizes the efficient utilization of resources
by avoiding wastage. Public expenditure reflects the government's use of resources, which
should not exceed what's necessary. Preventing wasteful use of public funds is crucial, especially
as government activities expand. As the scope of government actions grows, it becomes
challenging to pinpoint wasteful expenditures. Therefore, precise methods like program and
performance budgeting and zero-based budgeting have been developed to address this. While
budget classification can aid improvement, inherent limitations in government operations mean
that achieving optimal productivity in public expenditure is difficult.
2. Canon of Sanction: This principle asserts that public funds should only be used with proper
authorization, adhering to the purpose for which they were sanctioned. In a democratic setup, the
legislature approves expenditures upon request by the executive. This restriction prevents misuse
and misappropriation. Though flexibility exists for emergencies, detailed authorizations and
approvals are required at each stage of spending.
3. Canon of Benefit: This principle suggests that each expenditure should be evaluated based on
its expected benefits, aligning with the principle of maximum social advantage. However,
practical hurdles like subjective concepts, administrative difficulties, and data challenges make
complete adherence challenging. Still, efforts should be made to ensure public spending
generates net benefits for society.
4. Canon of Surplus: Originally urging governments to avoid persistent budget deficits, this
principle is now less favored due to changing economic thinking and interventionist policies.
Deficit financing is sometimes necessary for interventions, public debt creation, and resource
mobilization. It helps develop the financial and credit structure, supporting the growth process in
underdeveloped economies.
Overall, these canons guide responsible public expenditure management, emphasizing proper
authorization, expected benefits, and prudence in budgeting.

Effects of Public Expenditure

PUBLIC EXPENDITURE AND ECONOMIC STABILISATION: The text discusses the role
of public expenditure in stabilizing an economy, particularly in the context of fluctuations in
income, employment, and prices. It highlights that market forces alone can lead to economic
instability. The text refers to the ideas of economist John Maynard Keynes, who believed that
government should intervene in the economy during both depressions and booms. During a
depression, the government should increase its spending to boost demand and create jobs. This
can be financed through deficit spending or creating new money. In contrast, during a boom, the
government should reduce spending to control inflation by draining some purchasing power from
the economy.
However, the effectiveness of public expenditure as a tool for economic stability depends on a
well-functioning market with quick responses to changes. In underdeveloped countries with
rigidities, such as shortages and restrictions, achieving economic stability is more complex.
Additionally, inelastic demand for essential imports and weak export markets can pose
challenges, and public expenditure alone may not be enough to address these issues. A
combination of strategies, including import and export policies, is often needed to achieve
stability in underdeveloped economies.