Introduction

Public expenditure is a sine quo non to the welfare states. The concept of public expenditure plays a pivotal role in public finance. In the nineteenth century, the functions of the state were mainly limited to justice, police and arms. With the passage of time, the situation has altogether changed and economic activities have become complex leading to a greater attention to public finance. Since independence, public expenditure gained a significant place in our country to pull the economy out of its turmoils

Meaning and Objectives

Public expenditure refers to the expenses incurred by the government for the maintenance of the government and to preserve the welfare of society as a whole. In other words, it refers to the expenses made by the public authorities, i.e. Central Government, State Government and Local bodies to satisfy the common wants of the people. Public expenditure is not merely a financial mechanism but it also aims at securing social objectives.

Prof. Dalton classified the aims and objectives of public expenditure into two parts:

(a) Security of human life against the external aggression and internal disorder and injustice.

(b) Promoting maximum social welfare of the community.

Growth/Causes of Public Expenditure

Public spending enables governments to produce and purchase goods and services, in order to fulfill their objectives-such as the provision of public goods or the redistribution of resources.

Following are the main causes of Public Expenditure in India

Welfare States. In the modern times, states are the welfare states. They have the aim of promoting the economic, political and social life of the people. Besides, it is moral duty of the state to undertake the welfare functions like education, public health, living standard of the people.

To meet the Defence Needs. Every country pays greater attention to its defence preparedness against foreign attacks. The manufacture of modern nuclear weapons, training and planning of army is a very costly affair. As Adam Smith also said long ago, “Defence is better than opulence.” So public expenditure on defence is essential.

 Development of Agriculture and Industries. In developing countries like India, the development of agriculture and small-scale industries is the key factor of the progress of the economy. Every year, government spend huge amount for the disbursement of loans, providing subsidised fertilisers and pesticides on minimum prices to farmers. In addition to it, government also take measure to provide consumer goods and services at reduced cost. This led naturally to a greater share for public expenditure.

Rising Population. The increase in population account for better health and medical facilities resulting in increase public expenditure on roads, railways, hospitals, schools, colleges, etc. Apart from that, the state also has to bear additional responsibility of solving problems such as food, unemployment, housing, sanitation etc.

Urbanization. With the growth of population, there is migration of population from rural to urban areas in search of employment. Existing cities expand and new cities come up. These require huge public expenditure in providing civic amenities like water, lighting, roads, transport, schools, parks, houses, etc. Simultaneously, the expenditure on civil administration also increases.

Public debt and interest charges. The state borrows both internally and externally to meet its ever increasing public expenditure. This further raises public expenditure in the form of repayment of loans and interest charges.

Price Rise. In modern times, prices have a tendency to rise continuously with the increase in the growth rate of the economy. As a result, the government expenditure on goods and services increases. The rise in the cost of living further exaggerates the government expenditure.

Burden of Democracy. Modern governments are democratic in nature. Countries are run on a multi-party system with elections after four or five years. This tends to increase public expenditure. Further, there are “pressure groups” and “interest groups” within the parliament which want allocation of government funds for providing public services in their constituencies.

Development Schemes and projects. Modern government incurs huge amount for the development of both rural and urban folks, apart from gender equity. Schemes, such as, Digital India, Make in India, Ayushman Bharat, PM-KISAN, PM Garib Kalyan Yojana (PMGKY) have rendered huge expenditure on the part of the government.

Economic Development. Modern governments are engaged in the development of their economies. They spend large sums on infrastructural facilities, on research and development in various fields, development of public sector, increasing national income, uplifting marginalized section etc. This has led to the increase in public expenditure.

Trends of Public Expenditure

Public expenditure in India has been showing a remarkable growth and expansion in the recent past. It continues to be on increasing trend in almost all countries of the world. The expenditure trends both developmental and non-developmental largely depend on the stage of economic development, outlook of the government, ability of the government and prevailing economic conditions in the country.

As per the latest Union Budget 2020-21 Analysis, the Indian government proposes to spend ?30,42,230 crore in 2020-21, which is 12.7% above the revised estimate of 2019-20. Government spending in India decreased to 3807.47 INR Billion in the first quarter of 2020 from 3877.29 INR Billion in the fourth quarter of 2019.

It’s noteworthy that the Government spending in India was last recorded at 13.2 percent of GDP in the 2019-20 fiscal year.

Public Expenditure: Importance and Objects of Public Expenditure

Public expenditure is not merely a financial mechanism. It is rather a means of securing social objectives. Socialism, in any sense, can be realised only through progressive taxation and their distribution afterwards. 

Traditional economists held the view that the State should not interfere in the general activity, for the government is merely an agent of the people to keep the political organisation intact, hence it should spend public funds discretely and sparingly. A new approach to public finance has, however, evolved in the thirties since the Keynesian revolution in economic thought. Modern economists believe that public expenditure has a positive role to play to achieve definite ends. Its goal is to promote maximum social welfare.

In fact, the significance of public spending lies in the supply of those essential services by the government for the satisfaction of collective wants, which might not otherwise be provided economically and efficiently by the private sector. Its importance lies in its lubricating character also, as deficit spending of the government leads to the creation of additional money, which facilitates trade and exchange and stimulates further production and growth of national income.

In the modern era, public expenditure has the following objectives:

(a) provision of collective wants in order to optimise society’s consumption in a rational way and to maximise social and economic welfare.

(b) Control of the depressionary tendency in the market economy. Public spendings should be designed to optimise the level of investment in such a way as to maintain full employment with growth. In a free enterprise economy, through public expenditure incurred for appropriate public works programme, the gap of inadequacy of investment in the private sector has to be filled adequately. According to Keynes, public spending is, thus, required to sustain the level of effective demand in an economy.

(c) In a backward economy, public expenditure should accelerate the tempo of economic development by constructing the infrastructure of the economy and by increasing capital formation for augmenting industrial activity for the production of goods and services,

(d) A better distribution of income is also an equally important goal under socialism. Public expenditure for providing public services should lead to a just distribution of welfare.

Indeed, economic and social environment in a country is profoundly affected by public spending. In recent years, with the increase in its scope and magnitude, the economic consequences of public expenditure are very significant in the realisation of the general economic welfare. Public expenditure affects economic welfare in a community through its effects on production, distribution and economic growth at large.

Public expenditure has a vital role to play in the developmental process of a country.

It can promote economic development as follows:

1. By building economic overheads, e.g., roads, railways, irrigation, power, etc., the tempo of economic development can be boosted. Similarly, undertaking of social overheads such as hospitals, schools, etc. are also of great help.

2. By bringing about balanced regional growth, public expenditure can channelise the allocation of resources in a proper way and avoid lop­sided development and correct regional imbalances. More public spending may be incurred in the backward regions to uplift their economy.

3. By augmenting the development of agriculture and industry.

4. By exploiting and developing mineral resources, coal and oil.

5. By rural electrification programmes, it can bring about rural development.

In short, public expenditure has to create and maintain conditions conducive to economic development. It has to improve the climate for investment. It should provide incentives to save invest and innovate.

The major objects of public expenditure may be summarised as under:

i. Administration of law and order and justice.

ii. Maintenance of police force.

iii. Maintenance of army and provision for defence goods.

iv. Maintenance of diplomats in foreign countries.

v. Public administration.

vi. Servicing of public debt.

vii. Development of industries.

viii. Development of transport and communications.

ix. Provision for public health.

x. Creation of social goods.

Types of Public Expenditure:

Public expenditure may be classified into developmental and non-developmental expenditures. Former includes the expenditure incurred on social and community services, economic services, etc. Non-developmental expenditure includes expenditures made for administrative service, defence service, debt servicing, subsidies, etc.

Public expenditure is classified into revenue expenditure and capital expenditure. Revenue expenditure includes civil expenditure (e.g., general services, social and community services and economic services), defence expenditure, etc. On the other hand, capital expenditure comprises expenditures incurred on social and community develop­ment, economic development, defence, general services, etc.

Public expenditure may also be classified as plan expenditure and non-plan expen­diture. 

Non-plan expenditure falls under two broad heads, viz., revenue expenditure and capital expenditure. The former comprises interest payments, defence expenditures, subsidies, pensions, other general services (like health, education), economic services (like agriculture, energy, industry, transport and communication, science, technology and environment, etc.)

Expenditures on agriculture, rural development, irrigation and flood control, energy, industry and mineral resources, etc., are included in plan expenditure.

Principles Governing Public Expenditure :

Rules or principles that govern the expenditure policy of the government are called canons of public expenditure. Fundamental principles of public spending determine the efficiency and propriety of the expenditure itself. While making its spending programme, government must follow these principles. These principles, in short, are called canons of public expenditure.

Importance of Public Expenditure:

An old-fashioned dictum says that “The very best of all plans of finance is to spend little, and the best of all taxes is that which is least in amount.” No one today believes this philosophy. In the 1930s, J. M. Keynes emphasized the importance of public expenditure.

The modern state is described as the ‘welfare state’. As a result, the activities of the modern government have widened enormously. Modern governments are undertaking various social and economic activities, particularly in less developed countries (LDCs).

i. Economic Development: 

Without government support and backing, a poor country cannot make huge investments to bring about a favourable change in the economic base of a country. That is why massive investments are made by the government in the development of basic and key industries, agriculture, consumable goods, etc.

Public expenditure has the expansionary effect on the growth of national income, employment opportunities, etc. Economic development also requires development of economic infrastructures. A developing country like India must undertake various projects, like road-bridge-dam construction, power plants, transport and communications, etc.

These social overhead capital or economic infrastructures are of crucial importance for accelerating the pace of economic development. It is to be remembered here that private investors are incapable of making such massive investments on the various infrastructural projects. It is imperative that the government undertakes such projects. Greater the public expenditure, higher is the level of economic development.

ii. Fiscal Policy Instrument:

Public expenditure is considered as an important tool of fiscal policy. Public expenditure creates and increases the scope of employment opportunities during depression. Thus, public expenditure can prevent periodic cyclical fluctuations. During depression, it is recommended that there should be more and more governmental expenditures on the ground that it creates jobs and incomes.

On the contrary, a cut-back in government’s expenditure is necessary when the economy faces the problem of inflation. That is why it is said that by manipulating public expenditure, cyclical fluctuations can be lessened greatly. In other words, variation of public expenditure is a part of the anti- cyclical fiscal policy.

It is to be kept in mind that it is not just the amount of public expenditure that is incurred which is of importance to the economy. What is equally, if not more, important is the purpose of such expenditure or the quality of expenditure. The quality of expenditure determines the adequacy and effectiveness of such expenditure. Excessive expenditures may cause inflation.

Moreover, if the government has to impose taxes at high rates there will be loss of incentives. So, it is necessary to avoid unnecessary expenditure as far as practicable, otherwise benefits of better economic development may not be reaped. As a fiscal policy instrument, it may be counter-productive.

iii. Redistribution of Income:

Public expenditure is used as a powerful fiscal instrument to bring about an equitable distribution of income and wealth. There are good much public expenditure that benefit poor income groups. By providing subsidies, free education and health care facilities to the poor people, government can improve the economic position of these people.

iv. Balanced Regional Growth:

Public expenditure can correct regional disparities. By diverting resources in backward regions, government can bring about all-round development there so as to compete with the advanced regions of the country. This is what is required to maintain integration and unity among people of all the regions. Unbalanced regional growth encourages disintegrating forces to rise. Public expenditure is an antidote for these reactionary elements.

Thus, public expenditure has both economic and social objectives. It is necessary to ensure that the government’s expenditure is made solely in the public interest and does not serve any individual’s interest or that of any political party or a group of persons.

Effects of Public Expenditure:

Public expenditure is an important fiscal instrument to secure many fold social objectives in an economy. The traditional economist held the view that state should not incur more expenditure.

Adam Smith and other classical economists considered public expenditure as ‘unproductive’ and private expenditure was considered ‘productive’. This mistaken notion of the classist arose out of their false belief in the efficacy of Laissez-faire capitalism, in mitigating cyclical fluctua­tions and preserving full employment.

Adam Smith advocated mini­mum activities for the state. That is preservation of the community from aggressions and maintenance of law and order. Hence classi­cal economists were in favour of minimum public expenditure.

However, the world wide depression of 1930’s and the two global wars, proved faulty the classical faith on Laissez-faire. With the ad­vent of Keynes general theory, public expenditure came to be looked upon as an indispensable fiscal instrument of securing social wel­fare and correcting economic instability.

Moreover, there are areas of economy like provision of basic infrastructures, where market mecha­nism completely fails to distribute the cost of output production among expenditure beneficiaries through the pricing system.

Only the pub­lic sector can supply these welfare increasing facilities through bud­getary allocation. Hence in the modern world public expenditure in­fluence the national economy in a manifold manner. It is important therefore to examine how public expenditure affects the economy in various ways and secure social welfare.

1. Effects of Public Expenditure on Production:

According to Dalton the level of production and employment in any country depends upon three factors namely:

(a) Ability of the people to work, save and invest,

(b) Willingness to work save and invest, and

(c) Diversion of economic resources as between different uses and localities.

Public expenditure influences all these factors either posi­tively or negatively. Production depends upon the employment of re­sources by human labour assisted with capital. The capital stock of a country depends upon savings or the surplus over consumption.

Thus the way in which public expenditure effects production is deter­mined by its influence on the willingness and ability of the laborers to work, on the allocation of resources and on the amount of sav­ings. We shall now explain these effects in detail;

(a) Ability to Work, Save and Invest:

Public expenditure can influence ability to work, save and invest either favorably or unfavorably. If public expenditure is used as an instrument to promote the efficiency of a person to work, it will pro­mote production and national income. For example, public expendi­ture on education, medical services, cheap housing facilities etc. can increase the efficiency of a person to work.

At the same time, public expenditure can promote saving on the part of the lower in­come group by providing additional income to them, for, all the per­sons who has larger income can be normally expected to save lower amounts.

It improves their standard of living and efficiency and thereby their ability to work and save enhances. Finally public expenditure, particularly repayment of public debt, will place additional funds at the disposal of those who can invest.

Likewise expenditure incurred on the maintenance of law and order, will create confidence in the minds of the people, thereby creating a favorable investment cli­mate in productive activities. In this way public expenditure can pro­mote ability to work, save and invest and thereby production and employment.

On the other hand, if larger portion of public expenditure is channelized into wasteful social functions, on the production of in­toxicants, harmful drugs etc. it will adversely affect ability to work, save and invest.

Similarly, if heavy public expenditure is made on the construction of film studios, cinema houses, hotels and bars, rather than on the construction of roads, and other means of transport and communication, public expenditure creates unfavorable effect on ability to work, save and invest.

(b) Willingness to Work, Save and Invest:

The effect of public expenditure on the willingness to work, save and invest depends considerably on the expectation of future benefits. It also depends upon the character of public expenditure and the policy of the government. For example, pension, interest on loans, provi­dent fund, sickness benefit etc. provide security and safety to a person.

Therefore it reduces his willingness to work and save. The underlying principle is why should a person work hard and save, when he knows fully, that he will be looked after by the government when he is not in a position to earn any income.

He finds his future fully secured. In the absence of any saving, investment will notarise. Hence public expenditure should be regulated in such a way that it may not adversely affect the incentive to work of the people.

(c) Diversion of Economic Resources:

Public expenditure diverts resources from private to public use in many ways. Public expenditure has far reaching effects on the utili­zation of resources as between alternative uses. In the first place, there are such diversions of resources from private to public use, about which there is some doubt. Dalton talks about government expenditure on armaments and armed forces.

To meet such expenditure, the government diverts economic resources from the general public to the government. It is thought by many that these economic resources could have contributed to economic wel­fare, if they have been allowed to remain with the people themselves.

But it is also true that defence expenditure is essential for the safety and security of the nation without which no country can flourish eco­nomically. Hence in this context, defence expenditure is important from the national point of view. Alternatively, public expenditure may bring about a better allo­cation of economic resources between the present and the future. In a free capitalist society, very little provision is made for the future. This is because people prefer the present rather than the future.

The state on the other hand is the custodian of the interest of the future generation. It is the duty of the state to make adequate provision for the future generation. Unlike private individuals, the government can make investments in railways, irrigation projects, afforestation etc., which do not yield immediate returns, but can provide social and economic benefits to the future generation.

The government also spends money in the conservation of economic resources. Hence the diversion of resources from private to public sector for the con­struction of basic infrastructure and for preservation and conserva­tion of scarce resources is very essential for economic development. These kinds of expenditure exert a positive impact on production and economic activity of a nation.

Public expenditure can result in increased production in the so­ciety through changes in pattern and composition of production. Pri­vate sector is interested in maximization of profit and is not con­cerned with efficient allocation of resources. Public expenditure can induce diversion of resources from less essential products to more essential products by offering subsidies and other concessions.

Hence public expenditure in the form of subsidies and grants is helpful in directing the resources of the people to establish new industries as well as to accelerate production of existing industries. Similarly, public expenditure on social overheads like educa­tion, training, public health etc., produce favorable effect on produc­tion. It will increase social welfare and efficiency of production. Like­wise government spends money for encouraging and developing re­search and development activities and inventions and innovations.

The diversion of economic resources here will greatly increase pro­duction and enhance productive capacity. Government expenditure on public works programmes has also favorable effect on produc­tion and employment. Sometimes public expenditure may result in diversion of eco­nomic resources as between localities. This is done through central government grants to state governments to provide certain services more efficiently.

This will help to increase productive capacity and to reduce regional inequalities in development. For example, special expenditure in the form of grants incurred to the development of back­ward region help to reduce regional imbalance and to enhance pro­duction and economic development.

Prudently planned public ex­penditure can certainly bring about diversion of resources as be­tween regions which will improve the economic position of backward areas, and thereby increase production and employment. Further, public expenditure can also modify the allocation of re­sources and thus influence the composition of GNP. For example, an increase in public investment in highway construction may stimu­late automobile and allied industries and this expansion in turn may retard railway expansion.

Similarly, subsidies given for the assis­tance of particular industries may develop them at the expense of others. For example, if grants are given for building houses for middle or poor income groups, resources might flow to construction indus­tries.

On the whole, public expenditure exerts a wholesome influence on production. Dalton’s conclusion on the question of the effects of public expenditure on production and employment is that “whereas taxation taken alone, may check production, public expenditure, taken alone, should almost certainly increase it”.

It is possible that production will definitely be checked if carelessly planned, but it will stimulate production, if carefully planned.

2. Public Expenditure and Distribution:

In most communities and countries of the world, inequality in the distribution of income and wealth exists in different forms. This so­cial problem is undesirable on many grounds ethical, economic and political, among others.

The removal of or reduction in inequality in the distribution of wealth has now universally been recognized as an important objective of state policy. India also envisages a more equitable distribution of wealth. The tools of fiscal policy are directed towards achieving a fair distribution of income among the different classes of people in the society. The state tries to achieve this ob­ject partly by means of taxation or leveling down the wealth of the rich and partly by means of public expenditure or leveling up the wealth of the poor.

Both fiscal activities are ultimately linked with each other. They are complementary rather than competitive in char­acter. There are certain items of public expenditure which benefit indi­viduals and those which benefit society as a whole, in the list of expenditure which benefits individuals, the expenditure on social services, in the form of free medical aid and free education out of state funds will benefit the poor more than the rich. Such services imply a net addition to the income of the poorer classes.

Expendi­ture which benefits the society as a whole is those relating to gen­eral improvement. For example, good roads, free water supply in urban areas etc. However, any attempt to redistribute wealth by public expenditure, may reduce savings, firstly of those who are taxed and secondly of those who receive the benefits of such expen­diture.

In this context Colwyn Committee remarked “the effect of public expenditure on production seems to be in conflict with that on distribution. But up to a certain point, this is not the case. The diffi­culty is to know where the balance should be struck”.

Regressive, Proportional and Progressive Public Expenditure:

Regarding the distributive impact of public expenditure much de­pends on the nature of public expenditure and the policy underlying it. Just as there are proportional progressive and regressive taxes, in the same manner, government grants may be proportional, progres­sive and regressive. Public expenditure must be on the principle of ‘ability to receive’ (corresponding to ability to pay of taxation), if it has to secure an equitable distribution of wealth. Corresponding to the principle of minimum sacrifice in taxation, there is the principle of maximum benefit in public expenditure. Broadly, the principle of maximum social advantage should be the underlying criteria of pub­lic spending. From this point of view, expenditure on debt services is regressive because it gives more income to those who are rich.

Old age pension and expenditure on social insurance are progressive. In this context, it should be noted that a government grant reduces the desire to work and save, it lead to reduction of income of beneficia­ries. In this case inequalities of wealth distribution are reduced. A grant or public expenditure is regressive, if the addition it makes to the income of a beneficiary is smaller in the case of people with small income and higher in the case of people with high income. The best example is subsidy and interest offered by the government on public debt. The provision of free residence only to higher paid gov­ernment employees and not to low paid employees is a typical ex­ample of regressive expenditure.

In this case benefit of public expen­diture is reaped by the richer income group. This only helps to ag­gravate inequality of income. The public expenditure or grant will be proportional, when the proportion of additional benefit provided by the grant or public expen­diture is the same, whatever the size of the recipient income. In such case, there is no change in existing inequalities of income distribution. For example, if all categories of employees were given a house allowance at the same rate, say 10% of their salaries, it would be a case of proportional expenditure. A grant or public expenditure would be progressive, when the additional benefit provided by the grant or public expenditure is larger in the case of low income people and lower in the case of high income people.

The expenditure on social security like free medical aid, free education, subsidized houses etc. is progressive in nature. For example, if only the lower salaried employees were given free residential quarters, it is a case of progressive expenditure.Such expenditure helps to reduce the glaring inequality existing in the distribution of income. Dalton observes that system of public expen­diture is the best, which has the strongest tendency to reduce the inequalities of income.

Hence progressive public expenditure is the best anti-dot to reduce income inequality existing in the society.

Progressive expenditure can assume different forms. It may be in the form of cash grants-old age pensions, unemployment benefit, sickness and accident benefit. This act as a sort of timely help.

Progressive redistributive expenditure may also take the shape of provision of cheap or free services and commodities. Free primary education, free medical aid, subsidies to food and housing and the provision of free meals to school children are examples of this type of progressive grant.Such expenditure benefits the poorer among the poorest and helps to raise the living standards of the weaker sec­tions.

Reduction of glaring inequalities in the distribution of income, provision of certain minimum basic facilities to the weaker sections of the community is now rightly regarded as the primary social func­tions of any modern government. Public expenditure has therefore became an important instrument in the fiscal policies of modern governments to achieve certain social and economic objectives ori­ented towards the welfare of the community.

Conclusion

Undoubtedly, Public Expenditure plays a crucial role in the development of almost all the major economies of the world today. Its importance can even be reflected by its positive trend in the developing economy, like, India where ambitious plans are frequently implemented. As such, the modern governments are also resorting to deficit financing. Besides, it become very necessary for optimizing the government’s expenditure with efficiency and avoiding wastage, keeping in view the social welfare aspect of the economy.