Public Debt and Public Expenditure

<–2/”>a >Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provision, Infrastructure-2/”>INFRASTRUCTURE, etc. Until the 19th century, public expenditure was limited as laissez faire philosophies believed that Money left in private hands could bring better returns.

In Democracy, public expenditure is an expression of people’s will, managed through Political Parties and institutions. At the same time, public expenditure is characterised by a high degree of inertia and law-dependency, which tempers the will of the current majority.

Main objective of Public expenditure is to reduce the inequality of income. Expenditure on old age pensions, Unemployment relief, free Education, free mid-day meals etc. benefits the poorer classes of the community at the expense of the rich.Other objectives are:-

1. Provide social goods
2. Remove unemployment
3. Increase Production
4. Exploitation and Development of Mineral Resources
5. Promote Price Stability
6. Promote Balanced Growth
7. Reduce Inequality of Income

Wagnar’s law or “The Law of Increasing State Activity” states that “as the economy develops over time, the activities and functions of the government increase”.

According to Adolph Wagner, “Comprehensive comparisons of different countries and different times show that among progressive peoples (societies), with which alone we are concerned; an increase regularly takes place in the activity of both the central government and local governments constantly undertake new functions, while they perform both old and new functions more efficiently and more completely. In this way economic needs of the people to an increasing extent and in a more satisfactory fashion, are satisfied by the central and local Governments.”

Wagner explained his theory based on following bases:-

During industrialization process, public sector activity will replace private sector activity. State functions like administrative and protective functions will increase.
Governments needed to provide cultural and welfare Services like education, public Health, old age pension or retirement insurance, food subsidy, natural disaster aid, environmental protection programs and other welfare functions.
Increased industrialization will bring out technological change and large firms that tend to monopolize. Governments will have to offset these effects by providing social and merit goods through budgetary means.

Colin-Clark forwarded his view through “PUBLIC FINANCE and changes in the value of Money” about the growth of public-expenditure. According to them the share of government sector exceed 25% of the total economic activity in the economy, Inflation occurs even in the balanced budget. In this connection his opinions are;

“When the government’s share of the aggregate economic activities reaches the critical limit of 25% the community behavior pattern changes and people produces less since incentive are harmed by the fact that increasing proportions of additional income must be paid in taxes under progressive tax system.”

Dalton’s Principle of Maximum Social Advantage – maximum satisfaction should be yield by striking a balance between public revenue and expenditure by the government. Economic welfare is achieved when marginal utility of expenditure = marginal disutility of Taxation. He explains this principle with reference to

Maximum Social Benefit (MSB)
Maximum Social Sacrifice (MSS)

Peacock and Wiseman analyze the process of growth of public expenditure in terms of three different but related concepts; displacement, inspection and concentration effects. By the empirical analysis of the data of Britain on public expenditure, they were able to establish the relative growth of public sector expenditure in that country occurred on “step-like” pattern rather than on “continuous growth” pattern.

Musgrave and Rostow’s Development Model suggested that the growth of public expenditure might be related to the pattern of economic growth and development in societies. Three stages in the development process could be distinguished:

(a) The early development stage where considerable expenditure is required on education and on the infrastructure of the economy (also known as social overhead capital) and where private saving is inadequate to finance this necessary expenditure (in this stage, government expenditure must thus be a high proportion of total output);

(b) The phase of rapid growth in which there are large increases in private saving and public Investment falls proportionately; and

(c) High income societies with increased demand for private goods which need complementary public investment (e.g. the motor car and Urbanisation).

In recent years government expenditure is increasing faster than their ability to raise resources, because now their activities are not so restricted as only to maintain law and order and protect the country against external aggression. Therefore, when expenditure exceeds revenue, a deficit arises in the budget of the government. This deficit can be bridged by raising the revenue from taxation (by increasing the existing rates or by imposing new taxes) or by borrowing from the public. Both in developed and developing countries there are certain limits beyond which the taxation rates cannot be raised without adverse effects on the investment level or production and consequently on the rate of economic growth. Further, it taxes the rich and the poor alike which is not desirable for the welfare of any community.

Public Debt

Public debt is the total financial obligations incurred by the entire public sector of a nation, including guarantees and implicit debt. Public debt would include obligations evidenced by a legal instrument issued by the Central, State, Municipal, or Local Government or Enterprises owned or controlled by the Government; and other entities considered public or quasi public.

Internal debt refers to rupee-denominated debt, consisting of marketable securities (dated securities, Treasury Bills) and non-marketable securities (14 days Intermediate Treasury Bills, compensation and other Bonds, securities issued to international financial institutions etc.).

External Debt refers to the debt raised by the Union Government from non-domestic sources, namely, multilateral institutions like the International Bank for Reconstruction and Development (IBRD), International Development Association (IDA), Asian Development Bank (ADB) etc. or bilateral sources, i.e., directly from the foreign countries.

Liabilities in the Public Account (referred to as ‘other liabilities’) include National Small Savings Fund (NSSF), Provident Funds, Reserve Funds and deposits and special bonds issued to oil Marketing companies, fertilizer companies and Food Corporation of India. ‘Other liabilities’ are not included in the public debt.Total liabilities reported in the budget documents of the Central Government have been adjusted so that the outstanding debt truly reflects the outcome of fiscal operations of the Central Government.,

Public debt is the total amount of money that a government owes to its creditors. It can be divided into two categories: internal debt, which is owed to domestic creditors, and external debt, which is owed to foreign creditors. Public debt can be caused by a number of factors, including:

Government spending: When a government spends more money than it takes in through taxes and other revenue sources, it must borrow money to make up the difference.
Economic recessions: During recessions, tax revenue declines and government spending often increases, leading to a rise in public debt.
Natural disasters: Natural disasters can cause a government to incur large debts in order to rebuild infrastructure and provide assistance to those affected.
Wars: Wars are a major cause of public debt, as governments must borrow money to finance their militaries.

Public debt can have a number of consequences, both positive and negative. On the positive side, public debt can help to stimulate the economy by providing a source of funds for investment. It can also help to finance important public goods and services, such as education, healthcare, and infrastructure. On the negative side, public debt can lead to higher taxes, inflation, and a decrease in economic growth.

There are a number of ways to manage public debt. One way is to increase taxes. This can help to reduce the amount of money that the government needs to borrow. Another way to manage public debt is to cut spending. This can be difficult to do, as it often means reducing popular programs or services. Governments can also try to refinance their debt, which means borrowing money at a lower interest rate. This can help to reduce the amount of interest that the government pays on its debt.

Public expenditure is the total amount of money that a government spends on goods and services. It can be divided into two categories: current expenditure, which is spent on things like salaries, pensions, and welfare payments, and Capital Expenditure, which is spent on things like infrastructure and equipment. Public expenditure can be caused by a number of factors, including:

The size of the government: The larger the government, the more money it will spend.
The level of Economic Development: In developing countries, governments often spend more money on things like education and healthcare, while in developed countries, governments often spend more money on things like defense and infrastructure.
The political ideology of the government: Governments with different political ideologies tend to spend money on different things. For example, conservative governments tend to spend less money on social programs, while liberal governments tend to spend more money on social programs.

Public expenditure can have a number of consequences, both positive and negative. On the positive side, public expenditure can help to improve the Quality Of Life for citizens by providing them with access to goods and services that they would not otherwise be able to afford. It can also help to stimulate the economy by creating jobs and increasing demand for goods and services. On the negative side, public expenditure can lead to higher taxes, inflation, and a decrease in economic growth.

There are a number of ways to manage public expenditure. One way is to increase taxes. This can help to reduce the amount of money that the government needs to spend. Another way to manage public expenditure is to cut spending. This can be difficult to do, as it often means reducing popular programs or services. Governments can also try to improve the efficiency of their spending, which means getting more value for money from their spending.

Here are some frequently asked questions and short answers about public debt and public expenditure:

What is public debt?
Public debt is the total amount of money that a government owes to its creditors. It can be divided into two main categories: internal debt, which is owed to domestic creditors, and external debt, which is owed to foreign creditors.
What are the causes of public debt?
There are many factors that can contribute to public debt, including:
- Economic recessions: When the economy is in a Recession, tax revenues tend to fall and government spending tends to increase, which can lead to a rise in public debt.
- War: War is a major cause of public debt, as governments often borrow money to finance military operations.
- Natural disasters: Natural disasters can also lead to a rise in public debt, as governments often borrow money to rebuild infrastructure and provide relief to victims.
- Social programs: Governments often borrow money to finance social programs, such as healthcare, education, and welfare.
What are the consequences of public debt?
Public debt can have a number of negative consequences, including:
- Higher taxes: Governments may need to raise taxes in order to service their debt, which can place a burden on taxpayers.
- Inflation: When a government borrows too much money, it can lead to inflation, as the government prints more money to pay its debts.
- Currency Devaluation: When a government borrows too much money, it can lead to a devaluation of its currency, as investors lose confidence in the government’s ability to repay its debts.
- Economic instability: Public debt can contribute to economic instability, as it can lead to uncertainty about the government’s future Fiscal Policy.
What are the solutions to public debt?
There are a number of solutions to public debt, including:
- Economic growth: The best way to reduce public debt is to grow the economy, as this will lead to higher tax revenues and lower government spending.
- Fiscal Consolidation: Governments can also reduce public debt by cutting spending or raising taxes.
- Debt restructuring: Governments can also restructure their debt, which involves negotiating with creditors to reduce the amount of debt or the interest rate on the debt.
What is public expenditure?
Public expenditure is the total amount of money that a government spends in a given year. It can be divided into two main categories: current expenditure, which is spent on things like salaries, pensions, and healthcare, and capital expenditure, which is spent on things like infrastructure and equipment.
What are the causes of public expenditure?
There are many factors that can contribute to public expenditure, including:
- Economic growth: When the economy is growing, governments often spend more money on things like infrastructure and education.
- Population growth: When the population is growing, governments often spend more money on things like healthcare and education.
- Social programs: Governments often spend more money on social programs, such as healthcare, education, and welfare, when the economy is doing well.
- Natural disasters: Natural disasters can also lead to a rise in public expenditure, as governments often borrow money to rebuild infrastructure and provide relief to victims.
What are the consequences of public expenditure?
Public expenditure can have a number of negative consequences, including:
- Higher taxes: Governments may need to raise taxes in order to finance their spending, which can place a burden on taxpayers.
- Inflation: When a government spends too much money, it can lead to inflation, as the government prints more money to pay for its spending.
- Currency devaluation: When a government spends too much money, it can lead to a devaluation of its currency, as investors lose confidence in the government’s ability to repay its debts.
- Economic instability: Public expenditure can contribute to economic instability, as it can lead to uncertainty about the government’s future fiscal policy.
What are the solutions to public expenditure?
There are a number of solutions to public expenditure, including:
- Economic growth: The best way to reduce public expenditure is to grow the economy, as this will lead to higher tax revenues and lower government spending.
- Fiscal consolidation: Governments can also reduce public expenditure by cutting spending or raising taxes.
- Debt restructuring: Governments can also restructure their debt, which involves negotiating with creditors to reduce the amount of debt or the interest rate on the debt.

Which of the following is not a function of government?
(A) Providing public goods and services
(B) Regulating the economy
(C) Collecting taxes
(D) Investing in infrastructure
Which of the following is a type of public good?
(A) National defense
(B) Police protection
(C) Education
(D) All of the above
Which of the following is a type of public expenditure?
(A) Social security payments
(B) Medicare payments
(C) Defense spending
(D) All of the above
Which of the following is a way to finance government spending?
(A) Taxation
(B) Borrowing
(C) Seigniorage
(D) All of the above
Which of the following is a problem with government debt?
(A) It can lead to inflation
(B) It can crowd out private investment
(C) It can make it difficult for the government to respond to economic shocks
(D) All of the above
Which of the following is a way to reduce government debt?
(A) Increase taxes
(B) Cut spending
(C) Sell assets
(D) All of the above
Which of the following is a benefit of government debt?
(A) It can be used to finance investment in infrastructure
(B) It can be used to smooth out economic fluctuations
(C) It can be used to finance social programs
(D) All of the above
Which of the following is a way to increase government revenue?
(A) Increase taxes
(B) Sell assets
(C) Borrow money
(D) All of the above
Which of the following is a way to reduce government spending?
(A) Cut social programs
(B) Cut defense spending
(C) Cut infrastructure spending
(D) All of the above
Which of the following is a way to improve the efficiency of government spending?
(A) Privatize government services
(B) Outsource government services
(C) Implement performance-based BUDGETING
(D) All of the above