What is meant by Public Expenditure? Of the two main branches of public finance, namely, public revenue and public expenditure, we shall first study the public expenditure. How to Public expenditure is classified into 12 Criteria? The classical economists did not analyze in-depth the effects of public expenditure, for public expenditure throughout the nineteenth century was very small owing to the very restricted Government activities.
The Governments followed laissez-faire, economic policies, and their functions were only confined to defend the country from foreign aggression and to maintain law and order within their territories. But now, the expenditure of Government all the world over has greatly increased. Therefore, modern economists have started analyzing the effects of public expenditure on production, distribution, and levels of income and employment in the economy.
The following are the important classified or classification of public expenditure in the criteria made by different writers:
F.S. Nicholson classified public expenditure according to the amount of revenue the state realizes in return for the services which it performs through public expenditure.
He gives the following four classes of public expenditure:
- Firstly expenditure without any direct return of revenue, for example, poor relief and also the losses sustained in war.
- Secondly, expenditure without any direct return of revenue, but indirectly beneficial to revenue. For example free education. Better educated persons are better taxpayers and less expensive citizen than paupers and criminals.
- Thirdly, an expenditure with the partial direct return of revenue, for example, education for which fees are charged.
- Fourthly expenditure with full return of revenue or even profit. For example investment in public undertakings, railways, posts, and telegraphs, etc.
This classification is also subject to criticism. This classification is overlapping. The separation between the items is not clearly marked. This classification failed to bring out the essential differences in kind between the several forms of expenditure.
For example, defense and poor relief fall under the first category, however, they also confer an indirect benefit to revenue. By ensuring peace and tranquility defense ensures the smooth growth of productive activity and national income. This, in turn, will benefit public revenue considerably.
Another classification of public expenditure is proposed by H.C. Adams. Functional classification is based on a classification of the various functions actually performed by public authorities.
Adams classifies expenditure under three main functions of government:
- Protective Functions: This includes expenditure on defense, police, judiciary, social disease, prisons, etc.
- Commercial Functions: In this category include expenditure which helps the development of commerce and trade. Services sold to the citizens for a price (e.g., Post office, Railway, Insurance), subsidies and bounties granted, etc., are examples of commercial functions
- Developmental Functions: In this category include expenditure that help to develop the resources of the country. Expenditure under this category includes expenditure on education, provision of public recreation, public works, public health, etc.
This division is not free from imperfections. There is no clear cut dividing line between institutions maintaining law and order and those that promote progress. Expenditure incurred for protection is also capable of promoting development Prof. Adams states that with the progress of society, the protective expenditure trend to decline. But this proposition is propositioned by historical facts.
Common classification of public expenditure adopted by the 19th-century writers is based on the principle of Benefits Conferred. Such as the division adopted by Cohn and Plehn.
They divided public expenditure under the following four heads:
- Firstly, expenditure which confers a common benefit on all citizens or taxpayers, for example, defense, universal education is given to the residents free of charge, etc.
- Secondly, expenditure conferring a special benefit on some persons or in certain classes, for example; expenditure on poor relief.
- Thirdly, that class of public expenditure which confers a special benefit on certain people and at the same time a common benefit on all the others, e.g., the administration of justice.
- Fourthly, those items of expenditure which confer a special benefit only on some individuals; e.g., certain industries especially favored by the state (granting subsidy).
An obvious objection to this classification is that all public expenditure is for the common and public interest. It is very difficult to distinguish between special benefits and common benefit conferred. The satisfaction of special benefit may lead to the generation of the conmmon benefit. For example, expenditure on poor relief, which is specifically for the benefit of those immediately concerned, results in a common benefit such as prevention of crime, the satisfaction of the general sense of justice, etc.
As Nicholson rightly observed “Public expenditure which does not confer some common benefit or answer some public purpose ought not to exist in a modern state”, Hence Nicholson attempted to give a more scientific classification of expenditure.
Productive and Unproductive Expenditure Criteria:
Prof. Robinson classified public expenditure into productive and unproductive. Public expenditure is productive if it directly or indirectly helps to develop natural and human resources and help to increase national income.
Whereas public expenditure is unproductive if it does not add to enhancing the productive capacity of the nation. Unproductive expenditure is one that is consumed in the process of rendering the service.
In the social accounting sense, most of the countries have adopted economic classification. In this procedure, the expenditure and income of public bodies are classified into two heads.
- Revenue Account, and.
- Capital Account.
Revenue account includes an ordinary source of income and expenditure. Whereas capital account includes the extraordinary source of income and expenditure. Revenue expenditure includes all current expenditures on administrators including defense and public commercial undertakings.
Usually, expenditure does not result in the creation of assets treats as revenue expenditure. Whereas capital expenditure includes all capital transactions. These capital payments consist of capital expenditure on the acquisition of assets like land, buildings, machinery, equipment, etc.
Investments in shares and loans and advances granted by the central government are part of this. This classification also knows as functional classification. This classification provides a more detailed breakdown of revenue and capital expenditures of the government.
Plan and Non-Plan Expenditure Criteria:
Plan expenditure means the current development outlays as well as investment outlays. Whereas non-plan expenditure refers to the expenditure which the government is bound to incur and cannot do without it.
It includes both development and non-development expenditure. A broad-based classification of public expenditure as detailed above. Each classification has its own defects and omissions.
However, the sphere of state activity is dynamically changing in recent years. The nature and form of activities undertaken by the state are varying in length and attitude. Hence a perfect and systematic classification of public expenditure is very difficult to achieve.
According to J.S. Mills:
J.S. Mill based his division on the wants of the state, which in turn is determined by the functions of the state. He divides expenditure between obligatory or necessary and optional. This classification takes into account the nature of expenditure.
Expenditure incurred on defense, justice, and maintenance of economic institutions are obligatory. Owing to past contracts and other legal commitments, coupled with the concept of sovereignty, the state is not free to decide whether to incur this type of expenditure or not.
It is mandatory on the part of the government to incur obligatory expenditure. Whereas expenditure on social security measures is optional. The state can postpone or incur this type of expenditure depending upon the availability of resources. It is not compulsory in nature. It can if time warrants can postpone to a future date.
According to Shirra’s:
Prof. Findlay Shirras classified public expenditure into;
- Primary expenditure, and.
- Secondary expenditure.
Primary expenditure includes all those expenditures which governments are obliged to undertake, it is mandatory on the part of the government to incur these expenditures. It includes expenditure on defense, maintenance of law and order, civil administration, payment of the debt, etc.
These types of expenditures are essential for the existence of the state. All other expenditures, other than those under the category of primary expenditure are grouped into secondary expenditure. It includes expenditure on education, public health, poor relief, unemployment relief, and other expenses on social security measures.
According to Roscher’s:
Prof. Roscher classified public expenditure into three groups namely:
- Useful, and.
Necessary expenditure is that which the state has to incur and which cannot postpone to a future date. The best example is the expenditure on administration.
Useful expenditure is that which desires but can postpone.
Superfluous expenditure is that which the state may or may not occur. It otherwise calls ornamental expenditure.
According to Dalton’s:
Instead of following some strictly logical methods, Prof. Dalton gives a practical or empirical classification. According to Dalton, a broad distinction may draw between public expenditure designed on the one hand to preserve the social life of the community against violent attack whether external or internal and on the other, to improve the quality of the social life.
In other words, the object of public expenditure may be either to keep social life secure and ordered or to make that secure and ordered life better worth living whether from an economic or non-economic point of view.
Hence Prof. Dalton classifies public expenditure into two categories – grants and purchase price. When the state incurs expenditure and does not get any commodity or service in return, the expenditure classifies as a grant.
For example, expenditure on poor relief, payments of old-age social insurance, etc. are grants. When the state acquires or gets some commodity or service in return the expenditure is a purchase price.
The salaries of government employees, the price paid for purchasing a typewriter, etc., are the purchase price.
To quote Dalton,
“Payments by a public authority to any of its employees by way of salaries and wages or to contractors whom it employs, are purchase prices. On the other hand payments of old age, social insurance is granted.”
Dalton says that some public expenditure may be partly a purchase price and partly a grant. This is so when the state pays a price higher than what a private buyer would pay. The difference between the two is the element of grant at a purchase price.
Dalton thinks that interest on public debts and pensions grant if looked at from the point of view of the present, as in the present the state secure no commodity or service by incurring this expenditure.
However, if this expenditure looks at from a longer point of view then the state pays interest in return for the loans that secure in an earlier period. Similarly, pensions are a payment for service rendered in the past.
Dalton also made a distinction between direct and indirect grants. Direct grants are those whose benefits accrue to the persons who secure the grants, for example, poor relief. On the other hand, indirect grants are those where part of the benefit accrues to a person other than the recipient of the grant, for example, subsidies. Part of the subsidy may pass on to the purchaser of the commodity in the form of lower prices.
According to A.C. Pigou’s:
Pigou has classified public expenditure into the transfer and non-transfer public expenditure. Pigou in the revised edition of his book on public finance emphasizes the distinction between Transfer Expenditure which merely redistributes the money incomes of the members of the community and non-transfer expenditure which determines directly the uses to which part of the community’s productive resources shall be put.
He says that expenditure of money by government authorities may conveniently separate under two heads, the expenditure that purchases current service of productive resources for the use of these authorities and expenditure which consist of payments made either gratuitously or in the purchase of existing property rights to private persons.
The former group includes expenditure on navy-army, Civil service, educational service, judiciary, etc. The latter includes expenditure on the payment of interests on governmental debt, pension, etc. In the first edition of his book, the former type of expenditure, he called, exhaustive, while in the second edition he called it real expenditure.
In the third edition of he says,
“It is perhaps better to call them simply non-transfer expenditures. The latter type must call transfer expenditures.”
Non-transfer expenditure implies the actual using up of commodities and services which would otherwise have been available for some other purpose. In the social accounting sense, non-transfer expenditure always gives rise to the creation of output and equivalent money income.
For instance when the state pays salary to a soldier, then the soldier can utilize his service for no alternative purpose. In the absence of this expenditure, his service would have been available for some other purpose. Whereas transfer expenditure does not create any income or output.
According to Pigou,
“It implies only a transfer from the state to the recipients, of command over commodities and services.”
For example, social expenditure on the old-age pension, poor relief, etc.
According to Mehta’s:
Prof J.K. Mehta made a two-way classification of public expenditure. He categorized public expenditure into;
- Constant expenditure, and.
- Variable expenditure.
“Constant expenditure is that, the amount of which does not depend upon the extent of the use by the people, in whose interest it is incurred and upon the service that is financed by it.”
The expenditure on defense is a clear example of constant expenditure. Variable expenditure is that which increases with every increase in the uses of public services by the people, whose benefit it incurs. Expenditure on postal service is an example of variable expenditure.
Variable expenditure varies with the number of people using the service provided by the state. The essential feature of Mehta’s classification is that he uses the element of cost and not benefits as the basis of classification.
He also recognized the fact that every item of public expenditure cannot place wholly under one or another class and hence a clear-cut distinction cannot draw between them.