Public Finance NotesEffects of Public ExpenditureFor B.Com/BBA/MBA (CBCS and Non CBCS Pattern)
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Table of
Contents |
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1. Meaning of Public Expenditure 2. Objectives and Scope of Public
Expenditure 3. Role/Significance/Importance of Public
Expenditure 4. Difference between Public Expenditure and
Private Expenditure 5. Classification of Public Expenditure 6. Causes for Increase in Public Expenditure 7. Canons of Public Expenditure 8. Effects of Public Expenditure 9. Adverse effects of Public Expenditure |
Meaning of Public Expenditure
Public Expenditure refers to
Government Expenditure. It is incurred by Central and State Governments. The
Public Expenditure is incurred on various activities for the welfare of the
people and also for the economic development, especially in developing
countries. In other words 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.
Objectives of
Public Expenditure:
The major objectives of public expenditure are
a)
Administration of
law and order and justice.
b)
Maintenance of
police force.
c)
Maintenance of
army and provision for defence goods.
d)
Maintenance of
diplomats in foreign countries.
e)
Public
Administration.
f)
Servicing of
public debt.
g)
Development of
industries.
h)
Development of
transport and communication.
i)
Provision for
public health.
j)
Creation of
social goods.
Scope of Public Expenditure
Public Expenditure refers to
Government Expenditure for maintenance of the government and to preserve the
welfare of society as a whole. It is incurred by Central and State Governments
or local authorities. The Public Expenditure is incurred on various activities
for the welfare of the people and also for the economic development, especially
in developing countries. In other words 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.
Public expenditure
shows the decisions of the parliament and other independent executive bodies
for the scope of public expenses. It is measured with respect to the public
expenses made by the government in the previous year or last financial
interval. Public expenditure are classified into two parts: current expenditure
and capital expenditure. In the present world, public expenditure is very
important due to the following two reasons:
a)
The economic activities of the government have increased manifold.
b)
The nature and volume of public expenditure have important effects on
production, distribution and the general level of economic activity.
Therefore, it is the
need of the hour that state should participate in almost every field and the
government is responsible even for small matters. Some writers advocated that
public expenditure should be forced to deal with many day-to-day activities
like re-allocation of resources, redistribution activities, stabilizing
activities and commercial activities.
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Also Read:
2. Public Finance Question Papers (Dibrugarh University)
3. Public Finance Solved Question Papers (Dibrugarh University)
5. Public Finance Important Questions for Upcoming Exam
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Role/Significance/Importance of Public Expenditure
Gone are the days when any kind of state
intervention in the socio-economic affairs of a country was considered as a
positive hindrance in the smooth working of the economy. The state was to act
as passive spectator and the countries were left to the free working of the
economic forces. It was Prof. J. M. Keynes in the twentieth century, who
realised that state interference is necessary to keep the economy of a country
in a stable equilibrium and the road leading to the destination of full
employment. At a time when there was world-wide depression (1929-30), the
economies of the world were facing the acute problems of overproduction and
mass unemployment, private investment was showing a chronic deficiency, the
emphasis was shifted from private spending to public spending. The doses of
public spending served to uplift the economic system of the world through the
interaction of multiplier principle, from the cruel hands of worldwide
depression. The importance/significance/role of public expenditure may be
studied under the following heads:
1) Economic Development and Planning: Public
expenditure plays a crucial role in the economic development and planning. The
success of economic planning depends on the public expenditure because: (i)
Economic planning itself requires heavy public expenditure; (ii) For the
success of economic planning proper allocation of public expenditure is to be
done on different items, such as, roads, transport, irrigation, electricity and
power, industries, agriculture etc; (iii) the government is required to
establish and manage the working of several government undertakings including
public utility undertakings; (iv) Speedy capital formation is to be undertaken,
and (v) balanced economic development. All these require heavy public expenditure.
Planned development programmes cannot be undertaken without increasing public
expenditure.
2) Reduction in Disparities of Income and Wealth: Today,
great emphasis is being given in almost all countries of the world to the
reduction of disparities of income and wealth. Public expenditure has a vital
importance in the attainment of this vital objective. Programmes for the uplift
of the poor and backward classes may be undertaken by adopting a suitable
policy of public expenditure.
3) Economic Stability: Economic
stability of a country depends on the public expenditure. In case of
depression, heavy public expenditure is to be incurred for increasing
investment, capital formation and employment and also for saving the economy
from adverse effects of depression. On the contrary, in case of boom period
public expenditure is incurred in such a way as to increase production and
control the rising price-level.
4) Economic-Social Welfare: Economic-social
welfare in a country depends on the amount of public expenditure incurred on
them. Economic and social welfare programmes like labour welfare, child
welfare, women welfare, welfare of physically and mentally handicapped persons,
welfare of scheduled castes, scheduled tribes, backward classes and backward
areas, welfare of economically and socially weaker sections of the society etc.
all these require huge public expenditure.
5) Economic Development of Underdeveloped
Countries: It is now unanimously agreed that public expenditure plays a
positive role especially in the economic development of an underdeveloped
country. The problems of underdeveloped countries are in such a magnitude that
they cannot be left at the mercy of the old laissez-faire policy. Private
sector cannot undertake the development projects, where the large amount of
risk and capital investment is involved. The only available solution lies in
the rapid increase of public expenditure.
6) Increase in State Activities: Formerly,
the activities of the state were limited, i.e. internal administration, maintenance
of peace and order, judiciary and defence of the countries. Now-a-days the
state is required to perform several functions over and above the basic
functions, such as education, providing basic necessities like water and
electricity, transport, establishment of basic industries in particular, labour
welfare, banking including issue of currency, agricultural development,
socio-economic welfare, medical assistance to industries and trade,
entertainment etc. All these require huge public expenditure.
Difference between Public and Private Expenditure
a) Difference as to motive: The motive
of public expenditure is the welfare of the public whereas the motive of
private expenditure is purely personal welfare. Further, (i) the scope of
public welfare is wide whereas the scope of private welfare is limited; (ii)
the object of public expenditure is of long-term nature whereas the object of
private expenditure is of short-term nature.
b) Difference as to Economy: Greater
emphasis is placed on economy in case of public expenditure as against private
expenditure. An individual tries to gain maximum utility out of his expenditure
whereas the public expenditure does not have such an objective.
c) Difference as to Adjustment of Income and
Expenditure: Private expenditure is always adjusted according to income,
whereas in case of public expenditure, the government collects revenue
according to expenditure to be incurred. In other words, in case of private
expenditure we follow the principle of income first and expenditure next; on
the contrary, in case of public expenditure we follow the principle of
expenditure first and income (revenue) next.
d) Difference as to Elasticity:
Elasticity exists in case of private expenditure, whereas electricity does not
exist in case of public expenditure.
e) Difference as to control: In case
of private expenditure control exists in the hands of individual only who
actually incurs the expenditure. On the contrary, the control is varied in case
of public expenditure, such as, departmental control, assembly/parliament
control and audit control.
f) Difference as to Working: The scope
of working of private expenditure is limited, i.e. himself including his own
family, whereas the scope of working of public expenditure is quite wide.
g) Difference as to Effects: The
effect of private expenditure is limited, whereas the effect of public
expenditure is wide and far reaching.
Classification of Public Expenditure
Different economists have classified public
expenditure according to their own ideas about the suitability or importance of
the base. The main bases of classification of public expenditure are as
follows:-
(1) Classification
on the Basis of Benefit: Since the expenditure is incurred by the state with
the objective of conferring benefit on the society, it can be classified on the
basis of quantity of benefits which it confers on the various sections of the
society. German writers such as Prof. Cohn and American writers such as Plehn
have classified the public expenditure on the basis of benefit into four classes
:
(i) Public
expenditure benefiting the entire society, e.g., the expenditure on general
administration, defence, education, public health, transport etc.
(ii) Public
expenditure conferring a special benefit on certain people and at the same time
common benefit on the entire community, e.g. poor administration of justice
etc.
(iii) Public
expenditure directly benefiting particular group of persons and indirectly the
entire society, e.g. social security, poor relief, public welfare, pension,
unemployment relief etc.
(iv) Public
expenditure conferring a special benefit on some individuals, e.g., subsidy
granted to a particular industry.
(2) Classification
on the Basis of Revenue: Prof. F.S. Nicholson classified public expenditure on
the basis of amount of revenue obtained by the state in return for the services
rendered. His classification is given below :-
(i) Expenditure
with direct return of revenue, e.g. poor relief as well as direct toll on wars.
(ii) Expenditure
without direct return, e.g. expenditure on education.
(iii) Expenditure
with partial direct return, e.g. subsidised railway services, education for
which fees are charged etc.
(iv) Expenditure
with full return on event profit, e.g. gas service, post-office, public
enterprises etc.
(3) Classification
on the Basis of Function :- Prof. Adam Smith classified public expenditure on
the basis of functions of government in the following main groups :-
(i) Protection
Functions: This group includes public expenditure incurred on the security of
the citizens, to provide them with justice and counteract and external invasion
and internal disorder, e.g., defence, police, courts etc.
(ii) Commercial
Functions: This group includes public expenditure incurred on the development
of trade and commerce, e.g., development of means of transport and
communication, public enterprises etc.
(iii) Development
Functions: This group includes public expenditure incurred for the development
of citizens and country, e.g., education, public recreation etc.
(4) Classification
on the Basis of Importance: G. Findlay Shirras has classified public
expenditure into two following groups:
(i) Primary
Expenditure: It includes all expenditure which must be incurred by every state,
e.g., defence, maintenance of low and order, civil administration, payment of
debts etc.
(ii) Secondary
Expenditure: It includes public expenditure on the remaining items, e.g.,
social expenditure, education, public health, poor relief, unemployment
insurance etc.
(5) Classification
on the Basis of Necessary, Useful and Superfluous: Rosher classified public
expenditure into following three groups:
(i) Necessary
Public Expenditure: It includes public expenditure which the state has to incur
and which cannot be postponed.
(ii) Useful
Public Expenditure: It is that public expenditure which is desirable but can be
postponed.
(iii) Superfluous
Public Expenditure: It is that public expenditure which the state may or may
not incur.
(6) Classification
on the Basis of Productive and Unproductive :- Prof. Robinson classified public
expenditure under the following two heads:
(i) Productive
Public Expenditure: Productive public expenditure is that which directly or
indirectly develops natural and human resources and increases national income.
(ii) Unproductive
Public Expenditure: Unproductive public expenditure is that which does not
result in any rise of national income, e.g. expenditure on war.
(7) Classification
on the Basis of Transferability: Prof. Pigou classified public expenditure into
following two groups:
(i) Transferable
Public Expenditure: An expenditure is said to be transferable when it takes the
form of payment of money to people either gratuitously or in purchase of
existing property rights.
(ii) Non-transferable
Public Expenditure: An expenditure is said to be non-transferable public
expenditure when it is incurred to purchase current services of the resources
of the nation.
(8) Classification
on the Basis of Constant and Variable Expenditure :- Prof. J.K. Mehta
classified public expenditure into the following two groups:
(i) Constant
Expenditure: The constant expenditure is that amount which does not depend upon
the services that are financed by it. The expenditure on defence is a clear
example of the group of expenditure.
(ii) Variable Expenditure: Variable expenditure is that which increases with every increase in the uses of public services by the people for whose benefit it is incurred. Expenditure on postal service is an example of variable expenditure.
Causes for increase in Public Expenditure
There has been a persistent and continuous
increase in public expenditure in counties all over the world. It is due to the
continuous expansion in the activities of the state and other public bodies on
several fronts. The modern governments not only perform such primary functions
as the civil administration as well as defence of the country, but also take
considerable interest in promoting economic development of their countries.
Today, the state is taking active part in social and economic matters, such as
education, public health, removal of poverty and in commercial and industrial
development. The public expenditure has increased enormously in recent years
mostly due to the development activities of the state. Hence, the increase in
public expenditure is fully justified.
FACTORS OR
CAUSES OF INCREASE IN PUBLIC EXPENDITURE
One of the most important features of the
present century is the phenomenal growth
of public expenditure. Some of the important reasons for the growth of public expenditure are the following.
1) Welfare state: Modern states are no
more police states. They have to look in to
the welfare of the masses for which the state has to perform a number of
functions. They have to create and
undertake employment opportunities, social security measures and other welfare activities. All these require enormous
expenditure.
2) Defence expenditure: Modern warfare
is very expensive. Wars and possibilities
of wars have forced the nation to be always equipped with arms. This causes great amount of public
expenditure.
3) Growth of democracy: The form of
democratic government is highly expensive. The conduct of elections,
maintenance of democratic institutions like
legislatures etc. cause great expenditure.
4) Growth of population: tremendous
growth of population necessitates enormous
spending on the part of the modern governments. For meeting the needs of the growing population more educational
institutions, food materials, hospitals, roads and other amenities of life are to be provided.
5) Rise in price level: Rises in prices
have considerably enhanced public expenditure
in recent years. Higher prices mean higher spending on the part of the govt. on items like payment of
salaries, purchase of goods and services and so on.
6) Expansion public sector: Counties
aiming at socialistic pattern of society
have to give more importance to public sector. Consequent development of
public sector enhances public
expenditure.
7) Development expenditure: for
implementing developmental programs like Five Year Plans, Modern governments
are incurring huge expenditure.
8) Public debt: Along with debt rises
the problem like payment of interest and
repayment of the principal amount. This results in an increase in public
expenditure.
9) Grants and loans to state governments
and UTs: It is an important feature
of public expenditure of the central government of India. The government provides assistance in the forms of grants-in-aid
and loans to the states and to the UTs.
10) Poverty alleviation programs: As
poverty ratio is high, huge amount of expenditure
is required for implementing alleviation programmes.
Justification
for increase in Public Expenditure
Increase in public expenditure can be
justified on the following grounds:
a) Assists in
increasing state activities,
b) Increase
in welfare activities,
c) Reduces
disparities between rich and poor,
d) Boom for
rapid economic development specially in underdeveloped and backward economy,
e) Provides
economic stability, and
f) Brings
prosperity etc.
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Also Read following notes:
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Also Read:
2. Public Finance Question Papers (Dibrugarh University)
3. Public Finance Solved Question Papers (Dibrugarh University)
5. Public Finance Important Questions for Upcoming Exam
************************************
CANONS OF PUBLIC EXPENDITURE
The canons or principles of public expenditure
are the fundamental rules which govern the public expenditure policy of the
governments. The method and direction in which the public expenditure utilized
is of paramount importance Professor Alfred G.Buchler made some guidelines for
the utilization of expenditure by the public authorities. They are as follows:
a) Public expenditure should promote the
welfare of the society.
b) Careful judgement should be exercised by
the public authority and the electorate to ensure that the advantages of the
public expenditure should exceed the costs and that the fund utilized by the
governments will be more conducive to social welfare than the same funds would,
if privately utilized.
c) Public expenditure should be utilized in
the order of priority of welfare. That is, the services which will bring about
maximum welfare should be undertaken first.
Prof. Findlay Shirras has explained four
canons of public expenditure. They are canon of benefit, canon of sanction,
canon of economy and canon of surplus.
CANON OF BENEFIT: The ideal of this is maximum
social advantage. That is, public expenditure should be planned so as to yield
maximum social advantage and social welfare of the community as a whole and not
of a particular group. Public expenditure must be spent in those directions
which will maximise utility. It is possible only when the marginal utility from
different uses is equal. The public authorities should distribute resources so
as to increase production, reduce inequalities of income distribution, preserve
social life of the people, and improve the quality of social life etc. “Other
things being equal, expenditure should bring with its important social
advantages such as increased production, the preservation whole against
external attack and internal disorder and as far as possible a reduction in the
inequalities of income. In short, public funds must be spent in those directions
most conducive to the public interest. i.e., maximum utility is to be attained
in public expenditure.”---Findlay Shirras.
CANON OF ECONOMY: This implies that the state
should be economical in spending money. It should not spend more than the
necessary amount on items of expenditure. The sole aim is to avoid extravagance
and corruption. Social benefit can be maximised when resources are not wasted.
While incurring public expenditure social costs are to be minimised. To satisfy
this canon Project Appraisal and Cost Benefit Analysis are to be adopted.
“Economy means protecting the interests of the tax payers not merely in
effecting economies in expenditure, but in developing revenue.”—Shirras.
CANON OF SANCTION: According to this canon, no
expenditure should be incurred without the proper approval of the sanctioning
authority. It also implies that the spending authorities should spend the
amount for which it has been sanctioned and to see that the sanctioned amount
is properly utilized. Public accounts are to be audited at the end of financial
year. This canon acts as check on arbitrary, unwise and reckless spending of
public funds.
CANON OF SURPLUS: This canon believes in the
avoidance of deficit in public expenditure. According to Findlay
Shirras,”Public authorities must earn their living and pay their way like
ordinary citizens. Balanced budget must, as in the private expenditure; the
order of the day. Annual expenditure must be balanced without the creation of
fresh credits unrepresented by the new assets.”
Modern governments does not consider balanced
budget a virtue always. In an inflationary condition a surplus budget is
desirable as it reduces purchasing power of the individuals. Similarly, in the
time of depression a deficit budget is recommended in order to enhance the
purchasing power of the people. The canon of surplus is not relevant in modern
public finance.
CANON OF PRODUCTIVITY: Public expenditure
should promote production and increase the working efficiency of the people.
Major part of public expenditure should be incurred on developmental
activities. The aim of public expenditure should be maximum production,
employment and income.
CANON OF ELASTICITY: There should be
flexibility in government expenditure. That is, the government may be able to
change its public expenditure policy with changing conditions. It means that
public expenditure should increase during periods of emergency and reduce
during normalcy.
CANON OF EQUALITY: This implies that public
expenditure should be incurred in such a way that inequality in the
distribution of income should be reduced. For achieving this canon the benefit
of public expenditure should conferred more on the poorer section of the
society.
CANON OF NEUTRALITY: Public expenditure should
not worsen the production-distribution-exchange relationship instead of
improving it. Public expenditure should result in increased production and
productivity, reduced inequality of income and wealth and increased economic
activity and exchange relationship.
CANON OF CERTAINTY: The public authorities
should clearly know the purposes and extent of public expenditure to be
incurred. This anon explains the preparation of public budgets.
Effects of Public Expenditure
Public expenditure incurred according to the
sound principles of public finance, exerts healthy effects on the entire
economy of a nation. The ultimate effects of public expenditure, in the form of
greater production, more equitable distribution of wealth and all-round
economic development of a country, are always expected to be present, if the
expenditure is incurred after considerable thought and utmost rationality.
Gone are the days when it was advocated that
the state should interfere the least in economic activities and the government
is merely an agent for the people – responsible for the maintenance of justice,
police and army. In those days public expenditure on economic activities was
normally considered a waste. Contrary to this, a new concept of public
expenditure has been developed by the modern economists. Today, public
expenditure is regarded as a means of securing social ends rather than just
being a mere financial mechanism. In present times, Wagner’s Law of Increasing
Public Expenditure – both extensively and intensively, is considered
universally true. The trend of rising public expenditure is not confined to any
particular country, but it is found in almost all countries of the world,
irrespective of its socio-economic and political set-up. Every public
expenditure is considered desirable, when it is not wasteful, but has a
positive effect on production, distribution, consumption and thus maximizes
economic and social welfare of the country as a whole.
Effects of public expenditure can be studied
under the following heads:
a) Effects of
Public Expenditure on Production.
b) Effects of
Public Expenditure on Distribution.
c) Miscellaneous
Effects of Public Expenditure including Consumption.
Effects of
Public Expenditure on Production: While analyzing the effects of public
expenditure, Dalton very correctly said that just as taxation, other things
being equal should reduce production as little as possible, so the public
expenditure should increase it as much as possible. He further added that the
level of production and employment in any country depends upon the following
three factors:
1) Effects Upon the Ability to Work, Save and
Invest: If public expenditure increases the efficiency of a person to
work, It will promote production and national income. Public expenditure on
education, medical services, cheap housing facilities, means of transport and
communications, recreation facilities etc. will increase the efficiency of
persons to work. At the same time, public expenditure can promote saving on the
part of the lower income groups by providing additional income to them, for a
person who has larger income can be normally expected to save a larger amount.
Finally, public expenditure, particularly repayment of public debt will place
additional funds at the disposal of those who can save. Thus, it is evident
that public expenditure can promote ability to work, save and invest and thus
promote production and employment.
2) Effects on Willingness to Work, Save and
Invest: Public expenditure also affects the people’s willingness to work,
save and invest. Pension, provident fund, interest-free loan, free medical aid,
unemployment allowances and other government payments provide security to a
person and, therefore, reduce the willingness of persons to work and save –
after all, why should a person work hard and save when he knows fully he will
be looked after by the government when he is not in a position to earn any
income, i.e. he finds his future fully secured. In the absence of any savings,
the question of investment does not arise at all.
3) Effects on Diversion of Resources: Public
expenditure also affects the diversion of resources. For example, if the
government wishes to attract productive resources to a particular industry, it
will start giving financial assistance from its own funds to such an industry.
In the same way, if the government wishes to attract productive resources to a
particular area or region, it will start giving a variety of incentives in the
form of bounties, subsidies etc. (such as land at concessional rates, cheap
electric supply and water, loans on nominal rates of interest, freedom from
sales tax, income-tax etc. for a certain period, production subsidy etc.) to
the industrialists to achieve this objective.
Effects of
Public Expenditure on distribution: Public expenditure has its effects not
only on production but is also a most powerful weapon in the hands of the
government for bringing about an equitable distribution of wealth. For bringing
about an equitable and just distribution of wealth the government can use not
only its taxation policy but public expenditure policy can also help to a great
extent in achieving this very objective. In fact, the role of taxation and
public expenditure in removing inequalities of income is complementary and
supplementary. If the government intends to minimize the economic inequalities
that existed in the society, it should levy maximum about of taxation on richer
sections of the community, because their taxable capacity is undoubtedly high.
The income so earned through taxation should be spent on providing various
types of facilities, subsidies and amenities to the poorer section of the
community. For example, the state can extend to the poor benefits of old age
pensions, social insurance, free medical aid, cheap housing, interest-free
loans, subsidized food etc. This will automatically bring redistribution of
wealth (national income) in favour of the poorer section of the community. On
the contrary, public expenditure which confers larger benefits to the richer
sections of the community, e.g., subsidies on luxury goods, provision of
subsidized milk, other foodstuff etc. tends to widen the gap of inequalities.
As Dalton puts, “That system of public expenditure is best which has the
strongest tendency to reduce inequalities of income”. Public expenditure has,
thus, an important role in reducing economic inequalities in the community.
Miscellaneous
Effects of Public Expenditure:
Effect of
Public Expenditure on Consumption: Public expenditure also affects
consumption. Due to public expenditure the size of consumption tends to increase
in the economy. Since public expenditure tends to redistribute the income in
favour of poor people and their marginal propensity to consume being high, the
overall impact of public expenditure leads to a rapid increase in the
consumption of the economy. Many social goods are provided to the poor sections
of the community for consumption at relatively cheaper rates, e.g. free medical
aid, subsidies foodstuffs (rationing scheme), expenditure on education, public
parks, playgrounds, libraries etc. with the results that the real income of
beneficiaries increases and their capacity to consume, save and invest also
improves.
Effect of
Public Expenditure on Economic Stability: It is an admitted fact that public
expenditure has proved to be a powerful tool for bringing about economic
stability in the country. It is an excellent instrument for regulating and
controlling volume of employment in a country. The government should make a
substantial increase in public expenditure at a time of depression, because this
will help bring about an automatic increase in the volume of employment. On the
contrary, the government brings about a substantial reduction in its
expenditure at a time of boom (inflation), because this will help save the
economy from the adverse effects of inflation. Inflation is a condition when
investment exceeds savings. In this situation the aim of the government should
be to have a surplus budget, i.e. the governments spend less than its revenue.
The funds acquired by means of a surplus budget may be used to provide
additional capital to those sectors of economy which experience shortage of
capital so that the total productive capacity of the economy may increase. The
rising price-level may also be checked by increasing the production of goods and
services leading to control of inflation.
Effect of
Public Expenditure on Economic Growth: There is a close relationship
between public expenditure and economic growth. According to John Adler, a
rising proportion of additional output should be developed to capital
formation, so that the economic growth of an undeveloped country may be speeded
up. For this purpose, twofold change in the government budget is required.
Firstly, the government budget should be raised so that a rising proportion of
the additional output may be available for development purposes. Secondly, a
rising proportion of government revenues should be used to finance expenditure
on development. The basic infrastructural facilities required for economic
development can be provided with the help of public expenditure. In this way,
public expenditure has a significant role to play in the process of economic
growth.
Effects of
Public Expenditure on Employment: Unemployment is the burning problem
in underdeveloped countries, developing countries and now even in developed
countries of the world. Public expenditure can play a vital role in influencing
the level of employment in an economy. According to Prof. J. M. Keynes “The
government should step up its expenditure on public works such as roads,
buildings, canals at the time of depression and unemployment. This will add the
volume of employment in the economy.” On the contrary, the government should
cut down its expenditure to deal with the problem of the shortage of human
resources in a country.
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Also Read following notes:
************************************
Also Read:
2. Public Finance Question Papers (Dibrugarh University)
3. Public Finance Solved Question Papers (Dibrugarh University)
5. Public Finance Important Questions for Upcoming Exam
************************************
Adverse effects of public expenditure
According to Prof. J.K. Mehta, “Public
expenditure is a double-edged weapon. It can be much goods to the community,
but if it is unwisely made, it can be do much harm.” The bad or adverse effects
or dangers involved in the increase of public expenditure are as follows:
1) Unnecessary
Assistance to Industries and Business: If the government gives protection and
provides financial assistance to those industries and business which have lost
their shape and do not occupy any importance in the economic development of the
country then it is mere wastage of public resources. It will lead to
development of those industries and business which hinder the path of economic
development and thereby the country is likely to go to the worse.
2) Excessive
Expenditure on Defence: If the government incurs excessive expenditure on
defence, it will adversely affect the development of the poor and backward
community of the country. Pakistan is the burning example of the same. From
moral and human points of view also, excessive expenditure incurred on defence
is treated as uneconomic and unnecessary. It will also affect the security and
peace of the entire region.
3) Tendency
of gaining Political Influence: Now-a-days the concept of public expenditure is
being applied by ministers in particular for gaining political influence and
sounding vote bank. Huge amount of public expenditure is being done by both
Central and State ministers in their respective areas just to gain political
influence at the cost of other backward areas of the country / state. It leads
to severe criticism and dissatisfaction amongst the masses. It is also one of
the major factors of political instability in the country.
4) Advantages
to a Particular Community: Sometimes public expenditure is incurred just to
give advantage to a particular community or class over the above the other
communities. It will lead to division of the society in two clear-cut classes
leading to class conflicts, feelings of superiority and inferiority and more movement’s
unrest, strikes, dharnas etc. As a matter of fact, the peace of the entire
country is badly hurt and disturbed .
5) Rapid
Increase in Taxation: In order to meet the rising public expenditure,
government imposes new taxes every year leading to heavy incidence of taxation
on the community. If it is not enough, then the government takes the shelter of
deficit financing which leads to rapid inflation. The service class and poor
classes in particular are adversely affected.
6) Government
Expenditure in Misuse of Scarce and Limited Resources and also Unproductive:
According to traditional economists, government expenditure is the misuse of
scarce and limited resources of the country and also unproductive. They are of
the opinion only that public expenditure is productive which leads to physical
increase in the production of commodities mean for direct consumption.
7) Fear of
Minority Political parties: Political parties led by minority groups are always
fearful of the increases of public expenditure on the ground that the political
party or parties in power, with use the public expenditure in fulfilling their
own political interests.
8) Dominance of Public Sector Reduced the Authority of Private Sector: While citing the dangers of increase in public expenditure, capitalists argue that it reduces the authority of private sector which is the backbone of capitalist’s economy.
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