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:
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.
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
distinction
between
development
expenditures.

this classification into

and
non-development

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.

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,

administration.

defense,

law

and

order,

general

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.
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:
maintenance of courts, judges, public prosecutors.

include

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 citizens 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
expenditure:

are

the

principle

causes

of

growing

public

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-mens lands have been
brought under organized government. Also, 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. As a
Consequence, public expenditure has gone very high.
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
individuals will or power to save, it would be repugnant to the
canon of economy.
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 everrecurring 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.

Role of
Country:

Public

Expenditure

In

Developing

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 speedingup economic development. Social overheads 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 underdeveloped 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: 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.