Public expenditure full Chapter By K.K. Dewett

1. Public Expenditure
What is public expenditure?
Public expenditure refers to government expenditure, i.e. government spending.
It is incurred by central, state and local governments of a country.
Public expenditure can be defined 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”.
Classification of public expenditure:
Different economists have looked at public expenditure from different point of
view. The following classification is a based on these different views.
1. Functional Classification:
Some economists classify public expenditure on the basis of functions for which
they are incurred. The government performs various functions like defense, social
welfare, agriculture, infrastructure and industrial development. The expenditure
incurred on such functions fall under this classification. These functions are
further divided into subsidiary functions. This kind of classification provides a
clear idea about how the public funds are spent.
2. Revenue and Capital Expenditure:
Revenue expenditure are current or consumption expenditures incurred on civil
administration, defense forces, public health and education, maintenance of
government machinery. This type of expenditure is of recurring type which is
incurred year after year.
On the other hand, capital expenditures are incurred on building durable assets,
like highways, multipurpose dams, irrigation projects, buying machinery and
equipment. They are non-recurring type of expenditures. Such expenditures are
expected to improve the productive capacity of the economy.
3. Transfer and Non-Transfer Expenditure:

2. A.C. Pigou, the British economist has classified public expenditure as: -
• Transfer expenditure
• Non-transfer expenditure
Transfer Expenditure: -
Transfer expenditure relates to the expenditure against which there is no
corresponding return.
Such expenditure includes public expenditure on: -
• National Old Age Pension Schemes,
• 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 belong to the weaker sections
of the society. Such expenditure basically results in redistribution of money
incomes within the society.
Non-Transfer Expenditure: -
The non-transfer expenditure relates to expenditure which results in creation of
income or output.
The non-transfer expenditure includes development as well as non-development
expenditure that results in creation of output directly or indirectly.
• Economic infrastructure such as power, transport, irrigation, etc.
• Social infrastructure such as education, health and family welfare.
• Internal law and order and defense.
• Public administration, etc.

3. By incurring such expenditure, the government creates a healthy conditions or
environment for economic activities. Due to economic growth, the government
may be able to generate income in form of duties and taxes.
4.1 Productive and Unproductive Expenditure:
This classification was made by Classical economists on the basis of creation of
productive capacity.
Productive Expenditure: -
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 productive expenditure.
Unproductive Expenditure: -
Expenditures in the nature of consumption such as defense, interest payments,
expenditure on law and order, public administration, do not create any
productive asset which can bring income or returns to the government. Such
expenses are classified as unproductive expenditures.
4.2 Development and Non-Development Expenditure:
Modern economists have modified this classification into distinction between
development and non-development expenditures.
Development Expenditure: -
All expenditures that promote economic growth and development are termed as
development expenditure. These are the same as productive expenditure.
Non-Development Expenditure: -
Unproductive expenditures are termed as non-development expenditures.

4. 5. Grants and Purchase Price:
This classification has been suggested by economist Hugh Dalton.
Grants: -
Grants are those payments made by a public authority for which there may not be
any quid-pro-quo, i.e., there will be no receipt of goods or services. For example,
old age pension, unemployment benefits, subsidies, social insurance, etc. Grants
are transfer expenditures.
Purchase prices: -
Purchase prices are expenditures for which the government receives goods and
services in return. For example, salaries and wages to government employees and
purchase of consumption and capital goods.
6. Classification According to Benefits:
Public expenditure can be classified on the basis of benefits they confer on
different groups of people.
Common benefits to all: Expenditures that confer common benefits on all the
people. For example, expenditure on education, public health, transport, defense,
law and order, general administration.
Special benefits to all: Expenditures that confer special benefits on all. For
example, administration of justice, social security measures, community welfare.
Special benefits to some: Expenditures that confer direct special benefits on
certain people and also add to general welfare. For example, old age pension,
subsidies to weaker section, unemployment benefits.
7. Hugh Dalton's Classification of Public Expenditure:
Hugh Dalton has classified public expenditure as follows: -
Expenditures on political executives: i.e. maintenance of ceremonial heads of
state, like the president.

5. Administrative expenditure: to maintain the general administration of the
country, like government departments and offices.
Security expenditure: to maintain armed forces and the police forces.
Expenditure on administration of justice: include maintenance of courts, judges,
public prosecutors.
Developmental expenditures: to promote growth and development of the
economy, like expenditure on infrastructure, irrigation, etc.
Social expenditures: on public health, community welfare, social security, etc.
Pubic debt charges: include payment of interest and repayment of principle
amount
Role of Public Expenditure:
Adam smith had concentrated only on passive role of government under which a
government can support the smooth flow of economics with least interference in
economic activities. The government must look after,
1. Expenditure on defense, to protect the citizen’s from external aggression.
2. Expenditure on internal law and order, so as to bring about peaceful
functioning of economic activities.
3. Expenditure of government on administrative activities, for bringing about co-
ordering of difference economic activities to achieve economic and social welfare.
4. Expenditure on certain amount of infrastructure development, to help the
economy growth.
Causes of Increase in Public Expenditure:
The following are the principle causes of growing public expenditure:
1.Increase in area population: In the first place, the increase in public
expenditure is due to the fact that physical boundaries of the states have been
widened. ‘No-men’s lands have been brought under organized government. Also,

6. in certain cases, even if the area has not increased, the population figures have
considerably gone up. Government have, therefore, to cater to the needs of
millions of more people scattered perhaps over a much wider area.
2. Growth of state function: As already pointed out the modern state are no
longer police states concerned mainly with maintenance of law and order, they
are now regarded as welfare state. This has resulted in a tremendous increase in
their function.
3.Higher price level and Rising cost of public service: Another reason which
accounts for mounting public expenditure in the higher price level. Person who
have seen old days in India or have heard about them tell us that there was a time
when ghee was selling at four annals a seer whereas now it sells at twenty rupees
per kg.
4.Increase in national wealth: There has been almost a continuous improvement
in agriculture, rate and industry in every country through in some countries like
India it has been painfully slow.
5.Abillity to tax: In a low income economy it is difficult to impose and collect
taxes, but as economy develop a much wider range of taxes become available to
the state and as state revenue swells, public expenditure increase.
6.Expantion in social service: in modern time there has been remarkable
expansion in social service like education public health majorette in medical aid.
Expansion in education facilities to the establishment of school and college and
technical institution very large number.
7.As Musgraves observes” Efficient”, Product mix between private and social
good changes as per capital income rises and this change in gloves a rising share
of social group.
8.Technological changes: Technological invention call for larger or new
production in the public sector because it happiness that improvement in
technique can be best exploited by the state
9.Expention of public sector: Socialistic tendencies have in modern times resulted
in the expansion of public sector.

7. 10.Economic development: In all countries whether develop or under developed
the state have given top priority to economic development. The development
countries are desirous to rise their standard of living still higher.
Conclusion: Alfred Buehler says, in this public finance to some person a relative
increase in public expenditure seems a calamity too other it is cases of rejoicing
and to still other it is a matter of indifference, no definite percentage of national
income can be name as the proper limit for the cause of government since such a
limit must became relative retransfer expenditure such as old age pension has
increased recently by the government.
Principle of public Expenditure:
1.Principle of Maximum Social Benefits: According to Dalton, the best system of
public finance is that which secures the maximum social advantage from the
operations which it conducts.
Attainment of maximum social advantage requires that:
(i) Both public expenditure and taxation should be carried out up to certain limits
and no more,
(ii) Public expenditure should be so utilized among the various uses in an optimal
manner.
(iii) The different sources of taxation should so have tapped that the aggregate
sacrifice entailed is minimum.
2. Principle of Economy: It means that extravagance and waste of all types should
be avoided. Public expenditure has great potentiality for public good but it may
also prove injurious and wasteful. If the revenue collected from the taxpayer is
heedlessly spent, it would be obviously uneconomical.
To satisfy the canon of economy, it will be necessary to avoid all duplication of
expenditure and overlapping of authorities. Further, public expenditure should
not adversely affect saving. In case government activity damaged the individual’s
will or power to save, it would be repugnant to the canon of economy.

8. 3. Canon of Sanction: Another important principle of public expenditure is that
before it is actually incurred, it should be sanctioned by a competent
authority. Unauthorised spending is bound to lead to extravagance and over-
spending. It also means that the amount must be spent on the purpose for which
it was sanctioned. Allied to the canon of sanction, there is another, viz.,
auditing. A postmodern examination is equally important. That is, all the public
accounts at the end of the year should be properly audited to see that the
amounts have not been misappropriated or miss-spent.
4. Principle of Balanced Budget: Every government must try to keep its budgets
well balanced. There should be neither ever-recurring surpluses nor deficits in
the budgets. Ever recurring surpluses are not desired because it shows that
people are unnecessarily heavily taxed. If expenditure exceeds revenue every
year, then that too is not a healthy sign because this is considered to be the sign
of financial weakness of the country. The government, therefore, must try to live
within its own means.
5. Canon of Elasticity: Another same principle of public expenditure is that it
should be fairly elastic. It should be possible for public authorities to vary the
expenditure according to the needs. A rigid level of expenditure may prove a
source of trouble and embarrassment in bad times. Alteration in the upward
direction is not difficult. But elasticity is needed most in the downward
direction. It is not so easy to cut down expenditure. When the economy axe is
applied, it is a very painful process. Retrenchment of a widespread character
creates serious social discontent. Perfect elasticity is out of question. But a fair
degree of elasticity is essential if financial breakdown is to be avoided at the time
of shrinking revenue.
6. Avoidance of Unhealthy Effects on Production or Distribution: It is also
necessary to see that public expenditure exercises a healthy influence both on
production and distribution of wealth in the community. It should stimulate
productive activity so that the volume of production in the country increases and
it may be possible to raise the standard of living. But this object of raising of the
standard of living of the masses will be served only if wealth is fairly
distributed. If the newly created wealth goes to enrich the already rich, the
purpose is not served. Public expenditure should aim at toning down the
inequalities of wealth distribution. These two objectives may be in conflict when

9. attempts at reducing inequalities of income and wealth distribution adversely
affect production. This it can do by adversely affecting:
(i) Power to work and save, and
(ii) Will to work and save
Public expenditure can also benefit production through diversion of resources
from less productive to more productive occupations.
As for (i) power to work and save, it may be pointed out that much of the socially
desirable public expenditure incurred by modern governments undoubtedly
increases the community’s productive power and, consequently, also the power
to save. Such expenditure includes provision of means of communication and
transport; education, public health, scientific and industrial research; controlling
of human, animal and plant diseases and expenditure on social insurance, like
health insurance, unemployment insurance and old age pensions.
As for (ii) the will to work and save, much depends on the character of public
expenditure and the policy governing it. By giving the people expectations of
future benefits from public expenditure, it may blunt the edge of the desire to
work and save. The granting of old age pensions, insurance against sickness and
unemployment and provision of education of state expense must make the
people indifferent towards the future and make them neglect savings. People will
work less. But if such expenditure is kept within proper limits and if it helps the
really helpers, the check on savings may be mitigated. But when taxes are too
heavy, the people’s will to work and save may be discouraged and their power to
do so reduced. That limit should not be reached.
Role of Public Expenditure In A Developing Country:
1. Social and Economic Overheads: Economic development is handicapped in
under developed countries due to deficiency of capital and
infrastructure. Economic overheads like roads and railways, irrigation and power
projects are essential for speeding-up economic development. Social overheads

10. like hospitals, schools, and colleges and technical institutions are
essential. Capital for such overheads cannot be sufficiently come out of private
sources. Public expenditure has to build up the economic and social overheads.
2. Balanced Regional Growth: It is considered desirable to bring about a balanced
regional growth. Special attention has to be paid to the development of
backward areas and under-developed regions. This requires huge amounts for
which reliance has to be placed on public expenditure.
3. Development of Agriculture and Industry: Economic development is regarded
synonymous with industrial development but agricultural development provides
the base and has to be given the priority. Government has to incur lot of
expenditure in the agricultural sector, e.g., on irrigation and power, seed farms,
fertilisers factories, warehouses, etc., and in the industrial sector by setting up
public enterprises like the steel plants, heavy electrical, heavy engineering,
machine-making factories, etc. All these enterprises are calculated to promote
economic development.
4. Exploitation and Development of Mineral Resources: Minerals provide a base
for further economic development. The government has to undertake schemes
of exploration and development of essential minerals, e.g., gas, petroleum, coal,
etc. Public expenditure has to play its pivotal role in the exploration and
development of mineral resources.
5. Subsidies and Grants to Provinces, Local Govt’s, and Exporters: The central
government gives grants to State governments and the State governments to
local governments to induce them to incur some desirable expenditure. Subsidies
have also to be given to encourage the production of certain goods especially for
export to earn much needed foreign exchange.