What does Public Expenditure mean? Expenditure is the action of spending funds. Public expenditure refers to the expenses which the Government incurs for its maintenance as also for the economy as a whole. The Concept of Public Expenditure: Meaning, Definition, Classification, Types, and Principles.
Public expenditure can define 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.” Earlier it was thought that “Every tax is an evil” and public expenditure is “unproductive”.
Such ideas are no more nowadays. It means that the least amount of tax is to collect to meet “Three duties of the sovereign”. The three duties are the maintenance of internal law and order, defense from foreign attack and issue of currency.
Nowadays, public authorities have to incur expenditure on the protection of citizens as well as of public welfare and the promotion of socio-economic development. However, after the great depression of 1930 and war and post-war years, increasing attention was paid to the study of public expenditure. So, they refer to the expenses of public authorities like the central, state and local governments.
To carry on their functions, governments must obtain the services of labor and other factor units and (except in a completely socialist economy) acquire goods produced by private business firms.
Public expenditure consists of expenditure by the 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, defense activities, canals, and harbors, to protect trade, to maintain the coinage and to provide social security, education, and religious instruction.
They refer 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, this is about one-third of India’s national income.
Since national income is a fixed number, spending in one direction can achieve only at the expense of spending elsewhere. Thus, if the government spends a larger part of the national income on defense, less will remain with the people for their consumption, thereby leading to a reduction in their standard of living.
Similarly, too large an expenditure on the social services at the expense of defense 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 represents a compromise between competing desires. So, there is always a need for careful planning of public expenditure.
The theory of public expenditure has been more or less confining to that of generalities in terms of the effects of public expenditure on employment and price level. Even though public expenditure has increased rapidly during the last two centuries, in almost every state the area of them remains relatively unexplored.
Further, the level of public expenditure depends on government programs, which are the outcome of political decisions.
Gerhard Colm points out,
“The determination of government programmes is a political procedure and as such is carried on in a milieu, usually called ‘Politics’ which includes vote gathering, pressure by lobbies, log rolling and competition among political rivals.”
It is conventional in every textbook of public finance to classify public expenditures into various economic categories. The classification of public expenditure refers to the systematic arrangement of different items of state expenditure, on some specified economic basis.
Classification is always done on some logical and rational economic basis. Classification of public expenditure is important to understand the nature and effect of public expenditure. Through this classification, the state executive maintains effective control over them and prevented public funds leakages and wastages, diversions and misappropriations.
Classification of public expenditure is good for auditing and public funds can better safeguard against misappropriation. Classification of expenditure helps us to understand the relative importance of each head of expenditure at different times.
According to Prof. Shirras, the test of public expenditures not the aggregate expenditure but it is the relative amounts which are assigned to different heads from time to time. Hence classification of expenditure is important for a clear understanding of the nature and effects of them.
Economists have proposed various methods of classifying public expenditures. However, the methods differ widely from one another. This is because; there is little agreement between authorities of public finance regarding the best way of arranging the various kinds of state outlays.
Hence a completely satisfactory method is yet to emerge. Hence Mill, Roscher, Plehn, Nicholson, and Bastable have their methods. In this context, Shulz observes “Nineteenth-century fiscal writers devoted considerable space to the subject of the proper classification of government expenditure, but no two even agreed upon the same classification”.
There are a variety of ways in which they can classify but broadly it is classifying under the following heads:
According to the authority which spends the money viz;
According to the object of expenditure viz;
According to the nature of expenditure via;
Revenue Expenditure is current expenditure e.g. administrative and maintenance expenditure. This expenditure is of a recurring type which Capital Expenditure is of capital nature and is incurred once for all. It is non-recurring expenditure e.g. expenditure for building multipurpose projects or a setting up big factories like steel plants, money spent on land, machinery, and equipment.
The main bases of Types of public expenditure are as follows:
Capital Expenditure of the government refers to that expenditure which results in the creation of fixed assets. They are in the form of investment. They add to the net productive assets of the economy. Capital Expenditure is also known as development expenditure as it increases the productive capacity of the economy. It is an investment expenditure and a non-recurring type of expenditure.
For example; Expenditure, on agricultural and industrial development, irrigation dams, public -enterprises, etc, are all capital expenditures. Revenue expenditures are current or consumption expenditures incurred on civil administration, defense forces, public health and, education, maintenance of government machinery, etc.
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 a productive expenditure. All expenditures that promote economic growth development are termed as development expenditure.
Unproductive (known–development) expenditure refers to those expenditures which do not yield any income. Expenditure such as interest payments, expenditure on law and order, public administration, do not create any productive asset which brings income to the government such expenses are classified as unproductive expenditures.
Transfer expenditure refers to those kinds of expenditures against there is no corresponding transfer of real resources i.e., goods or services. Such expenditure includes public expenditure on; National Old pension Scheme, 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 to weaker sections of society. Such expenditure results in redistribution of money incomes within the society.
The Non-transfer expenditure relates to that expenditure which results in the creation of income or output The Non-transfer expenditure includes development as well as Non-development expenditure that results in the creation of output directly or indirectly. Economic infrastructure (Power, Transport, Irrigation, etc.), Social infrastructure (Education, Health and Family Welfare), Internal law and order and defense, public administration, etc. By incurring such expenditure, the government creates a healthy environment for economic activities.
The plan expenditure incurs on development activities outlined in the ongoing five-year plan. In 2009-10, the plan expenditure of the Central Government was 5.3% of GDP. Plan expenditure incurs on Transport, rural development, communication, agriculture, energy, social services, etc.
The non-plan expenditure incurs on those activities, which are not included in the five-year plan. It includes development and Non-development expenditure. It includes; Defence, subsidies, interest payments, maintenance, etc.
Mrs. Hicks classified the types of Public Expenditure based on duties of government. It is as follows:
Defense Expenditure: It is expenditure on defense types of equipment, wages, and salaries of armed forces, navy, and air-force, etc. It incurs by the government to provide security to citizens of the country from external aggression.
Civil Expenditure: Government/incurs this expenditure to maintain law and order and administration of justice.
Development Expenditure: It is expenditure on the development of agriculture, industry, trade and commerce, transport and communication, etc.
As the public is an important part of fiscal policy, certain principles or canons are laid down to which public expenditure should conform.
These principles of public expenditure or canons are as follows:
The government’s expenditure should so arrange as to secure the greatest possible net advantage, i.e., it should maximize the difference between the addition to welfare obtained by its expenditure and the social cost involved in obtaining the money. This principle has been calling by Dalton the Principle of Maximum Social Advantage.
This principle says that the government should economies its expenditure and avoid wasteful and extravagant expenditure. The principle requires that the revenue collecting from the tax-payer should be judiciously spent. As too much they lead to inflation and adversely affects savings, the economy in government expenditure is cardinal.
According to this principle, expenditure should incur only if it has been sanction by a competent authority. It usually sees that unauthorizing spending leads to extravagance and overspending. But when a competent authority looks into the pros and cons and then gives its verdict to incur the expenditure it means that the expenditure incurred will provide genuine utility and serve its definite purpose.
This principle states that it should be possible for public authorities to vary the expenditure according to need or circumstances. It means that they should be fairly elastic and flexible but not rigid. Rigidity proves to be a handicap in times of trouble alternation in the upward direction is not difficult but elasticity also needs in the downward direction.
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