Public Expenditure

What is Public Expenditure?

Public Expenditure, as the name signifies is the expenses that the government of different levels, i.e. central, state or local bodies, incurs either for its own maintenance or for meeting the common needs of the citizens or for promoting economic and social welfare.

For Instance: Expenditure to run government effectively by public authority be it expenditure on administrative purposes or for maintenance of law and order in the area. Moreover, the expenditure made to provide public utility services like education, public recreation, public works, public transportation, defence and so forth are some common examples of public expenditure.

Also, the government carries out multiple social and economic programmes, projects and schemes for which it incurs public expenditure. This may include:

  • Social Security to the public in the form of old age pensions
  • Economic and social overheads like transportation, communication, electricity etc
  • Maintaining economic stability
  • Welfare schemes related to education medical and housing
  • Economic development

Types

The different types of public expenditure are:

types-of-public-expenditure

Direct Expenditure

The expenditure that which government incurs to purchase goods and services, as well as on current services of inputs is direct expenditures. Alternatively, we call it exhaustive or non-transfer expenditure. The goods and services are utilized for the purpose of consumption or investment.

Expenditure on defence, civil services, educational services, post office, judiciary, health etc fall under this category.

Transfer Expenditure

Expenditures in the form of payment without corresponding return are transfer expenditures. This may include payment of interest on government debt, old age pension, sickness benefits etc.

Developmental Expenditure

Those expenditures which government incurs on the economic and social development of the nation such as education, health, research, infrastructure, agriculture, transport and communication, etc.

Non-developmental expenditure

The expenditure that the government incurs on the non-developmental work of the government falls in this category. This may include the supply of essential services like police, defence, administration of justice, interest payments, pension and retirement benefits, etc.

Productive Expenditure

Expenditures to improve the economy’s productive efficiency, i.e. they are just like investments, are productive expenditures. This may include the purchase of physical assets like machinery, factories and human capital like education, training and health.

Unproductive Expenditure

Such expenditures which do not improve the productive efficiency of the government are considered to hear. Therefore, they are just like consumption. It includes expenditure made on administration, defence, security, and maintenance of law and order. These indirectly improve the health and efficiency of the economy.

Causes of Increase in Public Expenditure

causes-of-increase-in-public-expenditure

  • Population Growth: Over the years, since independence population has grown exponentially. this resulted in increased spending on education, medical, defence, etc. Also, the aged population has also increased over time due to which expenses on the old age pension, social security and health facilities have also increased.
  • Defence Expenditure: Every country spends money to make its defence system stronger. Due to the modernization of defence equipment, defence expenditure increased tremendously.
  • Government Subsidies: It is also one of the main causes of increasing public expenditure as the government provides subsidies to people below the poverty line on items like grains, LPG, education, electricity and so forth.
  • Debt Servicing: Government raises loans from both internal and external sources. For this, a huge amount is spent to repay on account of debt servicing.
  • Development Projects: A range of development projects are being undertaken by the government. It includes projects related to irrigation, machinery, telecommunication, infrastructure, and so forth.
  • Urbanization: A large group of the population lives in urban areas and to provide the necessary amenities to people a heavy expenditure is incurred. This amount includes expenditure on maintenance of law and order in the state, education, development of roads and buildings, water supply, etc.
  • Industrialization: We all know that industries require a huge investment to set up be it a light or heavy industry. These industries in turn carry out production activities which produce goods and services to fulfil the needs of the population.
  • Increase in grants: No one knows when and where natural calamity will occur. The government provides aid to people who are prone to floods, droughts and earthquakes to help them restart their lives.

Canons of Public Expenditure

canon-of-public-expenditure

Canon of Benefit

Public Expenditure should be made keeping in mind the maximum benefit of the people, increase production, provide protection against external threats, maintain internal order and reduce the existing inequalities in society. Achievement of these objectives is possible only when the spending is not on an individual but on the entire society.

Canon of Economy

Incurrence should be economic and careful. Here the term ‘economic’ means there should be no extravagance or wastage of public money. That means public expenditure should be for productive purposes only. Spending of public money should be on very essential items that provide mutual benefits to all.

Canon of Sanction

Prior to the incurrence of public expenditure, sanctioning of the amount by a competent authority takes place. For this purpose, the authorities should follow proper procedures. Needless to say, when the sanction is not authorized by a competent authority, it may result in overspending. Here, one should note that the amount has to be spent for the purposes for which it was actually sanctioned.

Canon of Surplus

Saving is a characteristic of the government too. So, at the time of preparation of budget one should keep in mind the element of surplus. this implies that government should try to avoid a deficit budget, to increase its creditworthiness.

Canon of Elasticity

Public Expenditure needs to be elastic. It means officials and public authorities can make necessary changes in it whenever and wherever required. This is because when the public expenditure is rigid

Canon of Productivity

Next, public expenditure should promote the productivity of the nation. Spending of the funds should be in such a way that it encourages capital formation and increases employment opportunities for willing and competent youth.

Canon of Equitable Distribution

Equitable Distribution of wealth is one of the major issues which the economies of many countries are facing at present. Public Expenditure should promote equitable distribution of income and wealth between haves and have-nots. This will ensure more benefit to the weaker and poorer sections of society. Alternatively, we call it a canon of equality.

Canon of Certainty

Areas, where public expenditure is to be incurred, have to be certain to undertake the development properly. Also, the allocation of public expenditure to different uses should also be certain.

Canon of Coordination

There needs to be proper coordination between different levels of government. Also, clarity should be present among the different levels, as to the items and amount. This means that it should be clearly defined which level of government is responsible for spending the amount on a particular item.

Canon of Neutrality

It must not worsen the relationship between production, distribution and exchange rather than improve it. It must lead to an increase in production and productivity level, reduced income inequality, and exchange relationships.

Wrap Up

So, we all know that the nature and amount of public expenditure varies from country to country depending on the needs and requirements

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