PUBLIC EXPENDITURE
The term 'Public Expenditure' refers to the expenses incurred by the Government for its own
maintenance and also for the preservation and welfare of the society and economy as a whole.
Significance of Public Expenditure
Public expenditure plays four main roles:
1. it contributes to current effective demand;
2. it expresses a coordinated impulse on the economy, which can be used for stabilization,
business cycle inversion, and growth purposes;
3. it increases the public endowment of goods for everybody;
4. it gives rise to positive externalities to economy and society as a whole (or in specific
sectors and geographical areas), the more so through its capital component.
With its prioritised structure and its peculiar decision-making processes, it substantiates the
prevailing kind of State. One may distinguish at least three general models of state to which
public expenditure corresponds:
1. The minimal state, where only justice, public order, foreign policy and some other
basic functions should be carried out by the state, relying on private initiative for the
others;
2. The welfare state, where the State cares about the people's well-being directly, also
through expenditure in schooling, health, support for the poor, the old, the
disadvantaged;
3. The developmental state, where the State takes the responsibility of fostering
economic development, also through expenditure in infrastructure, support for
firms, innovation, export and production in general.
Both the welfare and developmental state include the items of the minimal state. Military
expenditure and special policies are common traits of the three models, maybe in different
proportions. In certain countries, public expenditure contains a wide arrays of waste and
resource dissipation, duplicative employment of low-productive bureaucrats, boosted
quotations in tenders, leading to super-normal profits of the few selected firms, which, if
there is any lax legislation, practice and enforcement, generate the incentive for
corruption. Transparency and public monitoring of prices of the goods purchased by
public authorities can substantially increase the efficiency and the consensus around
public expenditure. 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.
Public expenditure can be financed through taxes, public debt, money emission,
international aid.
Need for Public Expenditure :-
In modern economic activities public expenditure has to play an important role. It helps to
accelerate economic growth and ensure economic stability. Public Expenditure can promote
economic development as follows:-
1. To promote rapid economic development.
2. To promote trade and commerce.
3. To promote rural development
4. To promote balanced regional growth
5. To develop agricultural and industrial sectors
6. To build socio-economic overheads eg. roadways, railways, power etc.
7. To exploit and develop mineral resources like coal and oil.
8. To provide collective wants and maximise social welfare.
9. To promote full – employment and maintain price stability.
Types of Public Expenditure :-
Classification of public expenditure refers to the systematic arrangement of different items on
which the government incurs expenditure. Public expenditure can be classified as follows :-
1) Capital And Revenue Expenditure :-
Capital Expenditure of the government refers to that expenditure which results in creation of
fixed assets. They are in the form of investment. They add to the net productive assets of the
economy. Capital Expenditure is also known as development expenditure as it increases the
productive capacity of the economy. It is investment expenditure and a non-recurring type of
expenditure. For Eg. Expenditure – on agricultural and industrial development, irrigation
dams, public -enterprises etc, are all capital expenditures
Revenue expenditures are current or consumption expenditures incurred on civil
administration, defence forces, public health and, education, maintenance of government
machinery etc. This type of “expenditure is of recurrent type which is incurred year after
year.
2) Development And Non – Developmental Expenditure / Productive And Non –
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. All expenditures that promote economic growth
development are termed as development expenditure.
Unproductive (non – development) expenditure refers to those expenditures which do not
yield any income. Expenditure such as interest payments, expenditure on law and order,
public administration, do not create any productive asset which brings income to government
such expenses are classified as unproductive expenditures.
3) Transfer And Non – Transfer Expenditure :-
Transfer expenditure refers to those kind of expenditures against there is no corresponding
transfer of real resources i.e., goods or services. Such expenditure includes public expenditure
on :- National Old pension Scheme, 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 addsto the welfare of the people, especially to weaker
sections of society. Such expenditure results in redistribution of money incomes within the
society.
The non – transfer expenditure relates to that 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
(Power, Transport, Irrigation etc.), Social infrastructure (Education, Health and Family
welfare), Internal law and order and defence, public administration etc. By incurring such
expenditure, government creates a healthy environment for economic activities.
4) Plan And Non – Plan Expenditure
The plan expenditure is incurred on development activities outlined in ongoing five year plan.
In 2009-10, the plan expenditure of Central Government was 5.3% of GDP. Plan expenditure
is incurred on Transport, rural development, communication, agriculture, energy, social
services, etc.
The non – plan expenditure is incurred on those activities, which are not included in five-year
plan. It includes development and non – development expenditure. It includes :-Defence,
subsidies, interest payments, maintenance etc.
5) Other Classification
Hicks classified Public Expenditure on the basis of duties of government. It is as follows :
a) Defence Expenditure :-
It is expenditure on defence equipments, wages and salaries of armed forces, navy and air-
force etc. It is incurred by government to provide security to citizens of country from external
aggression.
b) Civil Expenditure :-
Government/incurs this expenditure to maintain law and order and administration of justice.
c) Development Expenditure :-
It is expenditure on development of agriculture, industry, trade and commerce, transport and
communication etc.
