Chapter 7

Public expenditure

Meaning
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.

Public expenditure can be defined as, "The expenditure incurred by public authorities like
central, state and local governments to satisfy the collective social wants of the people is known
as public expenditure."

Classifications of public expenditure

1. Revenue expenditure and Capital Expenditure
Revenue expenditure are current or consumption expenditures incurred on civil administration,
defense forces, public health and education, maintenance of government machinery. This type of
expenditure is of recurring type which is incurred year after year.

On the other hand, capital expenditures are incurred on building durable assets, like highways,
multipurpose dams, irrigation projects, buying machinery and equipment. They are non recurring
type of expenditures in the form of capital investments. Such expenditures are expected to
improve the productive capacity of the economy.

2.Developmental expenditure and Non-Development Expenditure:

If any particular expenditure by the Government promotes development. All those expenditures
of Government which promote economic growth are called developmental
expenditure.Expenditure on irrigation projects, flood control measures, transport and
communication, capital formation in agricultural and industrial sectors are described as
developmental.

On the other hand, expenditure on defence, civil administration (i.e., police, jails and judiciary),
interest on public debt etc., are put into the category of non-development expenditure.

3.Productive Expenditure and Unproductive 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.

Expenditures in the nature of consumption such as defence, interest payments, expenditure on

law and order, public administration, do not create any productive asset which can bring income
or returns to the government. Such expenses are classified as unproductive expenditures.

4.Transfer Expenditure and Non-transfer expenditure

Transfer expenditure :

Transfer expenditure relates to the expenditure against which there is no corresponding

return.Such expenditure includes public expenditure on National Old Age Pension Schemes,
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 belong to the weaker sections of the society. Such expenditure
basically results in redistribution of money incomes within the society.

Non-Transfer Expenditure:

The non-transfer expenditure relates to 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 such as power, transport, irrigation, etc.

Social infrastructure such as education, health and family welfare. Internal law and order and
defence. Public administration, etc.

By incurring such expenditure, the government creates a healthy conditions or environment for
economic activities. Due to economic growth, the government may be able to generate income in
form of duties and taxes.

Objectives of public expenditure

The main objective of public expenditure are as follow,
i) Developmental work:

Modern governments have also taken up developmental work in addition to their primary
functions of administration and defense. Government expenditure plays an important role for the
development social and economy infrastructure of the country.

ii) Welfare promotion:

The state is no longer the old law and order state. The modern state is a welfare state. It has to
spend increasing amount on such items as social insurance, unemployment relief, free medical
aid, free education etc. to improve the social and economic welfare of people.

Iii) Resources utilization:

There is under utilization of available resources in developing country. The public expenditure
brings into the proper utilization of natural resources as it requires huge amount to spend that the
general people cannot afford.

iv) Subsidies and grants:

The governments these days, give subsidies and grants to different industries to enable them to
increase the production of essential goods in the country. These subsidies and grants have special
place in the government expenditure of under developed & backward countries.

v) Reducing inequalities:

Government expenditure plays a vital role in reducing economic in equalities in the capitalist
countries. For e.g., the government can levy heavy taxes on the reached sections and spend the
income on providing cheap food, cheap housing, free medical aid etc., for the poorer sectors of
the society.

vi) check Inflation and Deflation:

Government expenditure as an instrument of fiscal policy, plays an important role in achieving

price stability in the country during reception, increase in government expenditure leads to rise
the aggregate demand and help to reception. Similarly during inflation, reduction in government
expenditure decreases aggregate demand and helps to control inflation.
canons of public expenditure
This canon implies that public expenditure should be planned in such a way as to yield maximum
social advantage and social welfare to the community as a whole and not to a particular group of
the community.

1)Canon of Benefit

Canon of benefit is one of the important canons put forwarded by Professor Kinley Shiras. By
this canon, public expenditure should aim to achieve maximum social benefits. It is based on the
principle of equality. Because maximum social benefits can be established only when the public
expenditure spends based on the principle of equality. That is, this canon accentuates to eradicate
inequalities and other social burdens in between different locations, uses of economic resources,
benefits of each sectors etc.

2) Canon of Economy

Similar to the canons of taxation, canon of economy is a strategic one. It refers the economizing
the public expenditure. That is public expenditure of an authority must aims to reap maximum
benefits with limited costs. Canon of economy is again emphasis on the prevention of over
expenditure and wastage in public finance. There must be proper planning in the economy for the
better utilization of its resources.

3) Canon of Sanction

Canon of sanction in public expenditure is connected with the process of approval of various
programs and schemes of government such as sanction of projects, researches, implementation of
various recommendations etc. There should be a cost-benefit analysis in the canon of sanction.
Then only maximum social advantages can be attained.

4) Canon of Surplus

Canon of surplus is another principle of public expenditure. This says that, the government must
follow reasonable policies in its budget. Canon of surplus accentuate on the avoidance of deficit
budget. Even though deficit budget helps the economy to generate more employment and income
particularly in times of depression, over spending will badly affect the entire economy and the
control of government over the economy. In short, canon of surplus highlights the major issues
of over spending and long run experienced deficit budget.
5) Canon of production and Distribution

This principle of public expenditure refers to the public expenditure must ensure maximum
productivity. This will help the country to achieve growth and development. Along with that, the
public expenditure aims at the sustainability. Similarly on the side of distribution, public
expenditure must be based on the principle of equality. It should help the country to eliminate
inequality in gender, community, classes etc.

6) Canon of Elasticity

The principle of elasticity says that, public expenditure must have the character of flexibility.
This is because, sometimes, the economy may in need of huge public expenditure particularly in
the time of depression. Therefore, it must be elastic in nature. Then only, economy can maintain
stability.

7) Canon of Certainty

Canon of certainty refers that, there should be a surety in public expenditure. Because, there are
so many groups in the economy, whose are interested to know about public expenditure. Surety
in public expenditure denotes the government support. This is very essential for the creation of
inspiration among producers, consumers and other economic agents.

8) Canon of Neutrality

This principle talks about the equilibrium in public expenditure. This means public expenditure
must keep an equilibrium level which is favorable to the entire parts of the economy. It should
not badly affect the economy such as production, distribution, exchange tec. In fact, canon of
neutrality is emphasis on the sustainability of an economy.

9) 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.
Causes of Growth of public expenditure

1. Income Elasticity and

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
1. Income Elasticity and
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
1. Expansion of traditional function

Government is traditionally required to perform functions like protection, general

administration, maintenance of law and order.

2. Welfare state

Apart from traditional functions , the government undertake various welfare activities
like social insurance, upliftment of weaker section to achieve social and economic well
being, health, education etc..

3. Rise in national income

As income rises beyond subsistence level i,e as basic necessities are satisfied, demand for
public good like education, communication, transportation, health service etc.. tend to
expand.

4. Growth of population

Demand for public services increases with the growth of population. Thus, Expenditure
for public education and healthcare etc..increases.
 5. Urbanisation

Increasing mobility of population to the urban areas leads to growth of cities. This has
increased the need for infrastructure and public services.

6. Inflation

As a result of inflation price of product increases continuously. Thus to maintain supply

of goods and services, the government has to spend more

Wagner’s law