<–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 expenditure is the total amount of money that a government spends on goods and services. It includes spending on things like education, healthcare, infrastructure, and defense. There are many different theories about why governments spend money, and the causes of growth in public expenditure vary from country to country.
One theory of public expenditure is that it is necessary to provide essential goods and services that the private sector cannot or will not provide. This includes things like education, healthcare, and infrastructure. Another theory is that public expenditure can be used to stimulate the economy and create jobs. This can be done by spending on things like infrastructure projects, which can create jobs in the construction Industry.
There are many different causes of growth in public expenditure. One cause is Population growth. As the population grows, the government needs to spend more money on things like education, healthcare, and social security. Another cause is economic growth. As the economy grows, the government needs to spend more money on things like infrastructure and defense.
Public expenditure can have a positive or negative impact on the economy. On the positive side, public expenditure can stimulate the economy and create jobs. On the negative side, public expenditure can lead to higher taxes and inflation.
Internal borrowing is when a government borrows money from its own citizens. This can be done through things like bonds and treasury bills. External borrowing is when a government borrows money from foreign countries or international organizations.
There are many reasons why a government might borrow money. One reason is to finance a budget deficit. A budget deficit is when the government spends more money than it takes in. Another reason is to finance capital projects. Capital projects are things like infrastructure projects, which can create jobs and stimulate the economy.
Borrowing money can have both positive and negative effects on the economy. On the positive side, borrowing money can help to finance important projects and stimulate the economy. On the negative side, borrowing money can lead to higher interest rates and inflation.
In conclusion, public expenditure is a complex issue with many different causes and effects. It is important to understand the different theories of public expenditure and the causes of growth in public expenditure in order to make informed decisions about how to manage public finances.
It is also important to understand the different types of borrowing and the potential effects of borrowing on the economy. By understanding these issues, we can make better decisions about how to use public money and how to manage our national debt.
Theories of public expenditure
- Public choice theory argues that public expenditure is determined by the self-interest of politicians and bureaucrats.
- Rational choice theory argues that public expenditure is determined by the preferences of voters.
- Public interest theory argues that public expenditure is determined by the need to provide public goods and services.
Causes of growth of public expenditure
- Economic growth leads to higher tax revenues, which can be used to finance higher public expenditure.
- Population Growth leads to higher demand for public goods and services, such as education and healthcare.
- Technological Progress leads to the development of new public goods and services, such as the Internet and space exploration.
- Political factors, such as the rise of interest groups and the expansion of the welfare state, can also lead to higher public expenditure.
Impact of public expenditure on the economy
Public expenditure can have a positive or negative impact on the economy, depending on how it is used.
- Public expenditure can stimulate economic growth by providing infrastructure, education, and healthcare.
- Public expenditure can redistribute income by providing social welfare programs.
- Public expenditure can stabilize the economy by providing unemployment benefits and Fiscal Stimulus during recessions.
However, public expenditure can also have a negative impact on the economy if it is not used efficiently.
- Public expenditure can crowd out private investment if it is too high.
- Public expenditure can lead to inflation if it is not financed by taxes or borrowing.
- Public expenditure can lead to a decline in economic efficiency if it is not used to provide public goods and services that are valued by the public.
Internal and external borrowings
- Internal borrowing is when the government borrows money from domestic sources, such as banks and individuals.
- External borrowing is when the government borrows money from foreign sources, such as other governments and international organizations.
Both internal and external borrowing can be used to finance public expenditure. However, external borrowing can be more expensive than internal borrowing, and it can also lead to a loss of Sovereignty if the government is unable to repay its debts.
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Public expenditure is the total amount of money that a government spends on goods and services. It includes both current expenditure, such as salaries for government employees, and Capital Expenditure, such as investment in infrastructure.
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There are three main theories of public expenditure: the public choice theory, the economic theory, and the political theory.
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The public choice theory argues that public expenditure is determined by the self-interest of politicians and bureaucrats. Politicians want to be re-elected, so they spend money on programs that will please their constituents. Bureaucrats want to increase their power and influence, so they spend money on programs that will expand their agencies.
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The economic theory argues that public expenditure is determined by the need to provide public goods and services that the private sector cannot or will not provide. Public goods are goods that are non-rivalrous and non-excludable. This means that one person’s consumption of a public good does not reduce the amount available for others to consume, and it is impossible to prevent someone from consuming a public good. Examples of public goods include national defense, law enforcement, and environmental protection.
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The political theory argues that public expenditure is determined by the political process. Politicians use public expenditure to buy votes, to reward their supporters, and to punish their opponents.
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The growth of public expenditure has been a major trend in the developed world over the past few decades. There are a number of reasons for this growth, including:
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The aging of the population: As people live longer, they require more government spending on pensions, healthcare, and long-term care.
- The rise of new social programs: In recent decades, governments have created new social programs to address a variety of issues, such as POVERTY, unemployment, and inequality.
- The increasing cost of providing public goods and services: The cost of providing public goods and services, such as education, healthcare, and infrastructure, has been rising in recent years.
The growth of public expenditure has had a number of impacts on the economy. Some of the positive impacts include:
- Increased economic growth: Public expenditure can stimulate economic growth by increasing demand for goods and services.
- Reduced inequality: Public expenditure can reduce inequality by providing social programs that help the poor and the disadvantaged.
- Improved infrastructure: Public expenditure can improve infrastructure, such as roads, bridges, and Airports, which can boost economic growth.
Some of the negative impacts of the growth of public expenditure include:
- Increased government debt: As government expenditure increases, so does the government’s debt. This can lead to higher interest rates and inflation.
- Reduced economic efficiency: Public expenditure can reduce economic efficiency by distorting the market and creating a disincentive to work.
- Increased Corruption: Public expenditure can increase corruption, as government officials may be tempted to use public funds for their own personal gain.
Internal borrowing is when a government borrows money from its own citizens. This can be done through the sale of Government Bonds or treasury bills. External borrowing is when a government borrows money from foreign governments or institutions, such as the World Bank or the International Monetary Fund.
Both internal and external borrowing can have a number of impacts on the economy. Some of the positive impacts include:
- Increased investment: Borrowing can be used to finance investment in infrastructure, education, and other productive sectors of the economy.
- Increased economic growth: Increased investment can lead to increased economic growth.
- Reduced unemployment: Increased investment can create jobs and reduce unemployment.
Some of the negative impacts of borrowing include:
- Increased government debt: Borrowing can increase the government’s debt, which can lead to higher interest rates and inflation.
- Reduced economic efficiency: Borrowing can reduce economic efficiency by distorting the market and creating a disincentive to work.
- Increased corruption: Borrowing can increase corruption, as government officials may be tempted to use borrowed funds for their own personal gain.