Public Expenditure: Meaning and Principles | Economics

In this article we will discuss about the meaning and principles of public expenditure.

Meaning of Public Expenditure:

In order to carry on their functions, governments must obtain the services of labour and other factor units and (except in a completely socialist economy) acquire goods produced by private business firms. Public expen­diture consists of expenditure by central government, state governments and local authorities (such as municipalities and public corporations), with central government accounting for the major portion of such expenditure. Thus, the state is required to maintain good roads, bridges, defence activi­ties, cannals and harbours, to protect trade, to maintain the coinage and to provide social security, education and religious instruction.

Government expenditure:

Public expenditure refers to the expenditure incurred by the central government. There are different types of such expenditure. The usual distinction is between consumption expenditure and investment expenditure. Another distinction is between revenue expendi­ture and capital expenditure.

The main items of government spending are the following:

Social services such as education, health and welfare and social security; defence, that is the cost of maintaining the armed forces; environmental services, that is, spending on roads, transport services, law and order, housing and the art; national debt interest, that is, interest payments on money borrowed by the government. At present, public expenditure is about one-third of India’s national income.

Since national income is a fixed number, spending in one direction can be achieved only at the expense of spending elsewhere. Thus, if the govern­ment spends a larger part of the national income on defence, less will remain with the people for their own personal consumption, thereby leading to a reduction in their standard of living.

Similarly, too large an expenditure on the social services at the expense of defence expenditure may put a threat to national security – and social security is meaningless if it is at the expenses of national security. As a result, the actual amount spent in each direction represent a compromise between competing desires. So, there is always a need for careful planning of public expenditure.

Principles of Public Expenditure:

Public expenditure is likely to have beneficial effect on society, i.e., reduction of income inequality, control of business cycles, achievement of full employ­ment and so on.

It is guided by the following five principles:

1. Economic Development:

A developing country like India must under­take various projects such as road and bridge construction irrigation dam power plants and so on. These constitute infrastructure of the economy or social overhead capital and are of vital importance for accelerating the pace of economic development.

The private sector is unlikely to make investment in such projects due to high cost and low return, at least, in the short run. But t government usually takes a long view of the economy’s require­ment. So, it is imperative that the government undertakes such projects. In India and other developing countries, such development projects are un­dertaken through the planning system.

2. Fiscal Policy:

Public expenditure is justified on the ground that it creates jobs and incomes during depression and unemployment. This is why Keynes advocated the policy of increasing public expenditure for creating effective demand and thus helping the economy to face the Son. Such variation in public expenditure is necessary to control business cycles. In other words, variation of public expenditure is a part of the anti-cyclical fiscal policy.

3. Maximum Social Advantage:

One of the objectives of a modem government is to achieve the social goal of income equality. For this, it is necessary to reduce poverty and inequality. This is why the government transfers income or purchasing power from one section of society to another through various tax-subsidy measures.

The government collects revenue S by imposing taxes and selling bonds. The money raised in the process is utilised to pay wages and compensation of government employees and the suppliers of various materials to government departments and public sector Undertakings.

Moreover, in a modern mixed economy pay­ments are made to certain sections of society without requiring them to provide anything to the government in exchange. Such payments are called transfer payments. Examples are unemployment compensation, payments to accident victim, pensions to the freedom fighters, payments to needy families, the handicapped and so on.

Moreover, outright subsidies are also paid to the small facers, artisans and other weaker sections of society at the cost of the taxpayers. Such measures are directed towards improving the existing pattern of income distribution or reducing income inequality.

Since the marginal (extra) utility of every rupee to a poor man is much greater than that to a rich man, appropriate use may be made of public finance (i.e., the government’s combined revenue expenditure) policy to secure maximum social advantage. However, care has to be taken to ensure that taxes are not too high to have unfavourable effects on incentives to produce earn and save.

Dalton has pointed out that the government should use public expenditure-cum-tax policy to maximise society’s welfare, i.e., to secure the maximum possible net advantage. This implies that the govern­ment should make the difference between the benefit of public expenditure and social cost involved in raising the money (to finance the expenditure) as large as possible.

4. Economy:

It may also be noted, in this context, that it is not just the amount of public expenditure that is incurred which is of importance to toe economy. What is equally, if not more, important is the purpose of such expenditure. The use or purpose of such expenditure determines the ade­quacy and effectiveness of such expenditure. Excessive expenditure may cause inflation.

Moreover, if the government has to impose taxes at high rates, there will be loss of incentives (especially tinder the present system of progressive taxation). So, it is necessary to avoid unnecessary expenditure to the maximum possible extent. It is very important to drastically curtail or totally avoid wasteful expenditures that cause uneconomic use of re­sources.

There are two ways of securing such ‘economy’ in government expenditure:

(1) The annual budget of toe central government must lay down the amount to be spent for particular purposes and the government servants or departments should not be permitted to spend in excess of the budgetary allocations.

(2) As soon as the budget grants are spent, the accounts are to be scrutinised by the Public Accounts Committee of the Parliament.

5. Avoidance of Harmful Effect:

Finally, it is of considerable importance to ensure that government expenditure does not have any injurious effect on production and distribution. It is equally vital to ensure that the government expenditure is solely in the public interest and does not serve any private interest or that of any group of persons.