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.
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.
(i) Canon of Benefit:
According to this canon, public spending has to be made in
such a way that it confers greatest social benefits. hus, public
expenditure is to be made in those directions where general
benefits rather than specific benefits flow in.
Any public expenditure for the development of a backward
area does promote social interest.
(ii) 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 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 sanction, 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.
(v) Canon of Elasticity:
The public expenditure should be fairly elastic. It should be
possible for public authority to vary the expenditure according
to need or circumstances. A fair degree of elasticity is essen­tial
if financial breakdown is to be avoided at a time of shrinking
revenue.
(vi) 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.
(vii) 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 maxi­
mize higher incomes.
(viii) 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 facili­
ties, 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.
 Classification of Public Expenditure
(1) Revenue Expenditure and Capital Expenditure:
Revenue expenditures are current or consumption
expenditures incurred on civil administration, defence forces,
public health and , education, maintenance of government
machinery etc. This type of expenditure is of recurrent type
which is incurred year after year.
Capital Expenditure of the government refers to that
expenditure which results in creation of fixed assets. They are
in the form of investment. They add to the net productive
assets of the economy. Capital Expenditure is also known as
development expenditure as it increases the productive
capacity of the economy. It is an investment expenditure and a
non-recurring type of expenditure. For Eg. Expenditure – on
agricultural and industrial development, irrigation dams,
public -enterprises etc, are all capital expenditures
(2) Development And Non – Developmental Expenditure /
Productive And Non – Productive Expenditure :-
Expenditure on infrastructure development, public enterprises
or development of agriculture increase productive capacity in
the economy and bring income to the government. Thus they
are classified as productive expenditure. All expenditures that
promote economic growth development are termed as
development expenditure.
Unproductive (non – development) expenditure refers to
those expenditures which do not yield any income.
Expenditure such as interest payments, expenditure on law
and order, public administration, do not create any productive
asset which brings income to government such expenses are
classified as unproductive expenditures.
(3)Transfer And Non – Transfer Expenditure :-
Transfer expenditure refers to those kind of expenditures
against there is no corresponding transfer of real resources
i.e., goods or services. Such expenditure includes public
expenditure on :- National Old pension Scheme, Interest
payments, subsidies, unemployment allowances, welfare
benefits to weaker sections etc. By incurring such expenditure,
the government does not get anything in return, but it adds to
the welfare of the people, especially to weaker sections of
society. Such expenditure results in redistribution of money
incomes within the society.
The non – transfer expenditure relates to that expenditure
which results in creation of income or output The non –
transfer expenditure includes development as well as non –
development expenditure that results in creation of output
directly or indirectly. Economic infrastructure (Power,
Transport, Irrigation etc.), Social infrastructure (Education,
Health and Family welfare), Internal law and order and
defence, public administration etc. By incurring such
expenditure, government creates a healthy environment for
economic activities.
(4) Plan And Non – Plan Expenditure
The plan expenditure is incurred on development activities outlined in
ongoing five year plan. For Eg In 2009-10, the plan expenditure of
Central Government was 5.3% of GDP. Plan expenditure is incurred on
Transport, rural development, communication, agriculture, energy,
social services, etc.
The non – plan expenditure is incurred on those activities, which are
not included in five-year plan. It includes development and non –
development expenditure. It includes :-Defence, subsidies, interest
payments, maintenance etc.
(5) Other Classification
Mrs. Hicks classified Public Expenditure on the basis of duties
of government. It is as follows :
a) Defence Expenditure :-
It is expenditure on defence equipments, wages and salaries
of armed forces, navy and air-force etc. It is incurred by
government to provide security to citizens of country from
external aggression.
b) Civil Expenditure :-
Government/incurs this expenditure to maintain law and
order and administration of justice.
c) Development Expenditure :-
It is expenditure on development of agriculture, industry,
trade and commerce, transport and communication etc.
Dalton’s Classification
(i) Expenditure on political executives
(ii) Administrative Expenditure
(iii) Security Expenditure
(iv) Administration of Justice
(v) Social Expenditure
(vi) Developmental Expenditure
(vii) Public Debt
 Economic effect of public expenditure
1. Effects on Production
The effect of public expenditure on production can be
examined with reference to its effects on ability & willingness
to work, save & invest and on diversion of resources.
(i) Ability to work, save and invest : Socially desirable public
expenditure increases community's productive capacity.
Expenditure on education, health, communication, increases
people's productivity at work and therefore their incomes.
With rise in income savings also increase and this in turn has a
beneficial effect on investment and capital formation.
(ii) Willingness to work, save and invest : Public expenditure,
sometimes, brings adverse effects on people's willingness to
work and save. Government expenditure on social security
facilities may bring such unfavourable effects. For e.g.
Government spends a considerable portion of its income
towards provision of social security benefits such as
unemployment allowances old age pension, insurance
benefits, sickness benefit, medical benefit, etc. Such benefits
reduce the desire to work. In other words they act as
disincentive to work.
(iii) Effect on allocation of resources among different
industries & trade : Many a times the government
expenditure proves to be an effective instrument to encourage
investment on a particular industry. For e.g. If government
decides to promote exports, it provides benefits like subsidies,
tax benefits to attract investment towards such industry.
Similarly government can also promote a particular region by
providing various incentives for those who make investment in
that region.
2. Effects on Distribution
The primary aim of the government is to maximise social
benefit through public expenditure. The objective of
maximum social welfare can be achieved only when the
inequality of income is removed or minimised. Government
expenditure is very useful to fulfill this goal. Government
collects excess income of the rich through income tax and
sales tax on luxuries. The funds thus mobilised are directed
towards welfare programmes to promote the standard of poor
and 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
positive impact on productivity of the weaker section of
society, thereby increasing their income earning capacity.
3. Effects on Consumption
Public expenditure enables redistribution of income in favour
of poor. It improves the capacity of the poor to consume. Thus
public expenditure promotes consumption and thereby other
economic activities. The government expenditure on welfare
programmes like free education, health care and housing
certainly improves the standard of the poor people. It also
promotes their capacity to consume and save.
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. Expansion of Public
expenditure during deflation & reduction of public
expenditure during inflation control money supply & bring
price stability.
5. Effects on Economic Growth
The goals of planning are effectively realised only through
government expenditure. The government allocates funds for
the growth of various sectors like agriculture, industry,
transport, communications, education, energy, health,
exports, imports, with a view to achieve impressive growth.
Government expenditure has been very helpful in maintaining
balanced economic growth. Government takes keen interest
to allocate more resources for development of backward
regions. Such efforts reduces regional inequality and promotes
balanced economic growth.