Public expenditure in economics | Public Expenditure.

What is Public Expenditure?

Public expenditure meaning in economics-

Public expenditure is the expenditure incurred by public authority for the satisfaction of collective needs of the citizens or for promotion of economic and social welfare that i.e. (that is)  state government, Central government, local bodies to satisfy the common wants of the people which they can not satisfy individually.

Major classification of public expenditure

Public expenditure in economics

The public expenditure has been classified into following heads-

(i) Development Expenditure: Development expenditure is the expenditure on activities which are directly related to socio-economic development of the nation. Such as-Expenditure on agricultural infrastructure and industry.

(ii) Non-Development expenditure: Non development expenditure are those expenditure which are not directly related with the socio-economic development process of the nation. Such as-expenditure on the flood relief.

(iii) Plan expenditure: Plan expenditure is the expenditure to be incurred during the year in accordance with the plan for the year.

(iv) Non Plan expenditure: Non plan expenditure is the expenditure other than the expenditure to the plan for the year.

(v) Capital Expenditure: Capital expenditure is an expenditure which leads to creation of assets or reduction in liabilities. As for example- Expenditure on purchasing land, loans granted to the state government.

It is also called types of public expenditure.

The major canons of public expenditure are given below-

(i) Cannon of Benefit: The most important canon of public expenditure is that the government should spent the public money in such a way as the society may receive maximum benefit out of it.

(ii) Canon of Economy: This canon implies that the government should be economical in its expenditure. All the wasteful expenditure should be avoided. Public expenditure must be productive and efficient. So, the state should not be spend more than the necessary amount on the iteams of public expenditure.

(iii) Canon of sanction: This canon implies to the proper procedure to be followed and the avoidance of the influence of vasted interests and uncertainty in the matter of public expenditure.

(iv) Canon of surplus: This canon implies that deficits in budget should be avoid and government should show surplus in its income.

(v) Canon of elasticity: It implies that expenditure policy of the government should be flexible i.e. (that is) it should be possible to change the size and the direction of public expenditure according to the requirements of the country.

(vi) Canon of productivity: This canon implies that the public expenditure policy should be such as to encourage the production in the country. It means that the major part of the country’s public expendiure should be allocated for production and development purpose.

(vii) Canon of certainty: Through proper budgeting and planning the government should make it specially clear how much amount will be spent in which area and during how much period.

(viii) Canon of equitable distribution: It implies that public expenditure should be incurred in such a manner that equilitic in the distribution of wealth and income are ensured. This canon is more important for those countries where glaring inequalities of income and wealth are prevailing.

(ix) Canon of neutrality: The term “Neutrality” is not used here in the static sense of keeping the economic setup at a stationary state. By “Neutrality” we only mean that public expenditure should not worsen the production, distribution, exchange relationship instead of improving it.

(x) Canon of performance: This canon implies the need of performance budgeting when public expenditure is made for the achievement of a particular purpose, it is essential that a review result is made at times and follow up measured when necessary.

(i) Increase in effective demand: Public expenditure increase effective demand because additional purchasing power comes to suppliers of different factors of production. As a result production rises.

(ii) Development of Infrastructure: The production capacity of a country depends on the development of the infrastructure such as roads, rail, electricity etc. Thus public expenditure on this sector will directly enhance the volume of production.

(iii) Development of Key industries: The overall production power directly depends on the development and expansion of the key industries such as iron and steel, cement, fertilizer etc. Thus expenditure on this sector will directly increase the production level of the country.

(iv) Research and development: Research and development are very important factor of production. This improves the methods of production and invents low cost, high production technology. Expenditure on the research and development will acceterate the productive capacity of the economy.

(v) Maintenance of peace: To ensure smooth growth of production, a sense of security in the mind of investors and producers is essential. Therefore public expenditure incurred on maintenance of internal and external peace encourages further investment and further production.

(i) Establishment of public sector industries: When public expenditure is made on setting up of public sector industries, employment is given to a number of people directly and indirectly.

(ii) Promotion of agricultural technology: In the UDCs (Under development countries) majority of people depends on agriculture but the agriculture activity is not very modern. For this reason the agricultural sector could not able to produce additional job facilities when public expenditure is made on the development of the agricultural technology sector then it can create more job facilities. As for example- development of irrigational facilities, mechanized agriculture etc.

(iii) Development of labour intensive: Industries when public expenditure is made on development and expansion of the labour intensive based industries then it will create more job, opportunities. As for example- development of the cottage and small scale industries in the rural and semi-urban areas.

(iv) Employment creation during the period of depression: Public expenditure is very much essential during the period of depression. In this period a small dose of public expenditure will create additional job for the people.

(v) Removal of regional imbalance: There is often rural urban disparity in the matter of employment. In the UDCs (Under Development countries) the unemployment problem is very critical in the rural areas. Public expenditure programmes in the form of special subsidies relating to supply of raw materials, input requirement, power etc. will divert investment from urban to rural areas. As a result, large employment opportunities will create in the rural areas.

(i) Productive efficiency of the poor: Public expenditure directed to supply to the poor, the education and medical facilities can increase their work efficiency and hence capacity to earn more income.

(ii) Social security measure: Public expenditure directed to provide social security measure for weaker section will also reduce the gap between poverty and prosperity. The provisions of old age pension, unemployment allowance benefits, sickness benefit, accident benefit, life insurance etc will greatly reduce inequality in the society.

(iii) Larger real income: The provisions for free housing, subsidies rationing a system of reward for hard work like extra allowance promotion etc incentive benefits to the weaker section will raise the real income of the poor people and hence reduce inequality.

(iv) Development of agriculture: Public expenditure directed on the development of the agriculture will increase the productive capacity of the poor farmers and hence reduce the income gap between rich and poor.

(v) Development of backward areas: The people living in the backward regions earns low income and live in poverty. A judicious public expenditure directed to develop these regions will raise the incomes of the people and their standard of living.

In the UDCs (Under development countries) the instabilty arises due to inflation. The public expenditure is considered as one of the most important anti-inflationary fiscal measure to check the instability or maintaining stability in the economy.

(i) Public expenditure during depression: During depression the effective demand comes down to a very low level. As a result, the income, price, saving, investment and marginal propensity to consume decline. In order to save the economy from the depression level it is very much essential to raise the effective demand through additional purchasing power. This can be done by injecting additional public expenditurev in the economy. This process is commonly known as “pump prining”.

(ii) Public expenditure during inflation: During inflation the economy is suffering from excessive purchasing power. Hence, to save the economy from inflationary price rise problem it is necessary to reduce the public expenditure. But in reality it is not easy to reduce the public expenditure programmes. For this reason, it is essential to curtail the unnecessary and unproductive public expenditure during inflation.  

Role of public expenditure in devloping countries or UDCs

The important role of public expenditure in India or in developing countries or under develop countries like India are mentioned below- 

(i) Development of infrastructure: The productive capacity of a country depends on the development of the infrastructure such as road, rail, electricity etc. But in UDCs like India this facility is very backward. Thus public expenditure in this sector will directly enhance the volume of production.

(ii) Public sector and key industries: Economic development can not proceed without some basic industries like steel, cement, enginneering goods and some manufactured products. Incidentally these industries not only require heavy investment to start with but they are also to wait for long to produce output. This is because development of the basic key sector or industries will encourage investment in the private sector.

(iii) Balance regional development: Underdevelop economics are characterised by lopsided development and regional disparities. Public expenditure can remove this unbalanced development if it is directed to open up revenues of industrial growth and improved agriculture in the backward regions. By choosing such region for the establishment of projects economic advancement of the locality can be induced because their will be increase in production, income and employment on the one hand and reduction of inequility on the other.

(iv) Development of labour intensive industries: When public expenditure is made on development and expansion of the labour intensive industries then it will create more job opportunities. As for example- Development of the cottage and small scale industries in the rural and semi-urban areas.

(v) Large real income: The provisions for free housing, subsidised rationing, a system of reward for hard work like extra allowances, promotion, etc. incentive benefits to the weaker section will raise the real income of the poor people and hence reduce inequility.

(vi) Development of agriculture: The productivity of agriculture which is the main source of living in underdeveloped countries is very low. Agriculture is over burdened with surplus labour whose marginal productivity is said to be zero in most cases. If govt. funds are used to provide irrigational and flood countrol facilities and supply of improve seeds, fertilizers, mechanised agricultural tools and implements etc. productivity and income of the poor people can be greatly enhanced. Hence it will reduce the income gap between rich and poor.

(vii) Social security measure: Since poverty is widespread in underdeveloped countries, public expenditure directed to provide social security measure to weaker section will not only being a sense of security which is very important factor of productivity but will also reduce the gulf between poverty and prosperity.

(viii) Price level stability: During inflation the economy is suffering from excessive purchasing power. Hence to save the economy of the UDCs from inflationary price rise problem, it is necessary to reduce the public expenditure. But in reality it is not easy to reduce the public expenditure programmes. For this reason it is essential to curtail the unnecessary and unproductive public expenditure during inlation.

(ix) Population control and family welfare: UDCs (Under develop countries) are suffering from heavy pressure of population on the other hand and low life expectancy on the other hand. Disproportionately large population means poor per capita income, poor national income and large magnitude of unemployment public expenditure may be directed to draw up scemes for controlling population on one hand and to take care maternity welfare and healthy development of infonts. These measure will result in increased per capita income, increased productivity and reduce magnitude of unemployment.

(x) Effects on ability and willingness to work, save and invest: Ability and willingness to work depends on increased efficiency of labour and incomes of people. Public expenditure directed to supply free and subsidised educational and medical facilities together with improve technology of production will directly enhance the capacity and willingness to work and raise the income of people with increased income, people’s marginal propensity to save and invest will raise because they will have now large purchasing capacity to leave a surplus after meeting their consumption  needs.

Note: It is also called the principles of public ecpenditure.

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