Chapter Three

Chapter Outlines
Public Expenditure
Causes of growth in public expenditure
Public expenditure: Canons, Theories
Effects of public expenditure on production and
employment & distribution and income
Public expenditure & control of inflation
Content of development expenditure & debates

1
 Meaning of Public Expenditure
Public expenditure is expenses incurred by the public
authorities’ central, state & local self- gov’ts.
They are made for the maintenance of the gov’ts as well as for
the benefit of the society as a whole.
There was a misbelief in the academic circles in the 19thc that
public expenditures were wasteful.
This conservative thinking died down in the 20thc, especially
after WW II.
As a modern state is termed a ‘welfare state’, the horizon of
activities of the gov’t has expanded.
Why public expenditure increase throughout the world?

2
 Causes of Public expenditure
a. Size of the country & 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 gov’t
has resulted in a growth of PEs in these areas.
b. Income Elasticity & Increase in Per Capita Income
According to Musgrave, a rising share of public expenditure in
national income is associated with a rise in per capita income.
Thus, an increase in per capita income over a period of time may
cause a relative rise in public expenditure.
This is because the demand for public goods tends to expand with the
rise in per capita income. 3
 Causes of Public expenditure
c. Effects of war and need of defense
The tremendous growth in public expenditure may also be
attributed to wars & threats of war in modern times.
In WWII, countries like England incurred heavy war
expenditures, amounting to £ 15 million per day.
Wars & threats of war & the consequent defense needs compel
gov’ts to spend more on the production of war goods.
International political situation is uncertain & insecure.
Modern States are already facing a cold war.
As such, every nation has to prepare itself for strong defense.
The defense expenditure is thus continuously rising.
It contains expenditure on war materials, maintenance & growth
of armed forces, naval & air wings, expenses on the development
of military art & practice, cost of rehabilitation, etc. 4
 Causes of Public expenditure
d. Welfare state ideology and Wagner’s law
The modern State is a welfare state.
It aims at promoting the economic, political, & social well-being
of its citizens.
It makes every effort to improve the living standard of the
common people.
For this purpose, it has to undertake many functions & services
never visualized before.
In the classical era, the State was assumed to have a very limited
function under the laissez faire policy.
The functions of the State were restricted to justice, police, &
army.
Today, however, the role of the State has changed under the
welfare criterion. 5
 Causes of Public expenditure
e. Resource Mobilization & Ability to finance
When the gov’t innovates more methods of taxation & resource
mobilization, its ability to finance PEs increases & the size
grows.
Public sector outlays could be increased by more taxation yields,
public debt, foreign aid and deficit financing.
f. Inflation
With the rising prices, the government has to keep on increasing
public expenditure to carry out its functions & maintain the
supply of public goods.
During inflation, the government has to pay additional
allowance to its employees which obviously call for an extra
burden.
g. Urbanization effect, Rural development effect, so on 6
 Types of Public expenditure
Public expenditure may be classified into developmental and
non-developmental expenditures.
Developmental expenditure includes the expenditure incurred
on social & community services, economic services, etc.
Non-developmental expenditure includes expenditures made
for administrative service, defense service, debt servicing,
subsidies, etc.

7
 Canon 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.
a. Canon of Benefit
b. Canon of Economy
c. Canon of Sanction
d. Canon of surplus
However, other scholars proposes 4 additional canons:
Canon of elasticity, neutrality, productivity and equal distribution

8
 Canon of Public expenditure
a. 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 for general benefits
rather than specific benefits flow in.
Any public expenditure for the development of a backward area
does promote social interest.

9
 Canon of Public expenditure
b. Canon of Economy
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 public
spending, it is necessary that the canon of economy is
observed.
An uneconomic expansion in public expenditure will result
in scarcity of funds which lower social benefit.
10
 Canon of Public expenditure
c. Canon of Sanction
The canon of sanction, requires that public
spending should not be made without any
correspondence 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.
This is done to safeguard against the
possibility of unwise & reckless expenditure.
11
 Canon of Public expenditure
D. 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.
Gov’t should be able to increase expenditure during periods of
economic emergency & to decrease during periods of normalcy.
E. canon of Neutrality
This implies public expenditure should have no adverse effect
on production & distribution activities of the economy.
Public expenditure should only result in increased production,
re­duced inequality & wealth & increased economic ac­tivity.

12
 Canon of Public expenditure
F. Canon of Productivity
Public expenditure should be always directed towards enhancing the
productive capacity of the economy.
It shall help to raise level of employment, income, effective demand
etc. of the economy.
The goal of public expenditure should be to maximize higher incomes.
G. Canon of Equal distribution
Public expenditure should minimize inequalities in the distribution of
income and Wealth.
The expenditure pattern of the government should be so designed to
benefit the poorer sections of the community.
NB: 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. 13
 Effects Of Public Expenditure On Production & Distribution
Effects of public expenditure on production
The effect of public expenditure on production can be
examined with reference to its effects on:
a. Willingness and Ability to work, save & invest
Socially desirable public expenditure increases community's
productive capacity.
Expenditure on education, health, communication, increases
people's productivity at work & their incomes.
With rise in income savings also increase and this in turn
has a beneficial effect on investment and capital formation.

14
 Cont’d
c. Effect on allocation of resources among d/t industries & trade
Many times the government expenditure proves to be an effective
instrument to encourage investment on a particular industry.
e.g. If government decides to promote exports, it provides benefits
like subsidies, tax benefits to attract investment.
2. Effects of public expenditure on distribution
The primary aim of the government is to maximize social benefit
through public expenditure.
The objective of maximum social welfare can be achieved only when
the inequality of income is removed or minimized.
Government expenditure is very useful to fulfill this goal.
Government collects excess income of the rich through income tax
and sales tax on luxuries.

15
 Cont’d
The funds thus mobilized are directed towards welfare programs to
promote the standard of poor & weaker section.
Thus public expenditure helps to achieve the objective of equal
distribution of income.
Expenditure on social security & subsidies to poor are aimed at
increasing their real income & purchasing power.
Public expenditure on education, communication, health has a +ve
impact on productivity of the weaker section of society.
3. Effects on consumption
Public expenditure enables redistribution of income in favor of poor.
It improves the capacity of the poor to consume.
Thus public expenditure promotes consumption and thereby other
economic activities.

16
 Cont’d
4. Effects on economic stability
Economic instability takes the form of depression, recession and
inflation.
Public expenditure is used as a mechanism to control instability.
The modern economist Keynes advocated public expenditure as a
better device to raise effective demand & to get out of depression.
Public expenditure is also useful in controlling inflation & deflation.
5. Effects on economic growth
The goals of planning are effectively realized only through
government expenditure.
The government allocates funds for the growth of various sectors like
agriculture, industry, transport, communications, impressive growth.
Government expenditure has been very helpful in maintaining
balanced economic growth.
17
Thank You!!!!

18