A.

INTRODUCTION

Public expenditure means those amounts which are spent by the government for
different purposes. It consists of goods and services bought by the state and its articulations.
Saleemi, N (2006).
Also Public expenditure refers to the expenditure incurred by public authorities like
central, state and local governments to satisfy the collective social wants of people. Hyman, D
(2O14).
According to Paine, V (2001) Public expenditure can be classified in terms of first, the
kind of goods and services bought also with very general items, capital goods, and consumption
goods and personnel expenditure.
Second, public expenditure can be classified according to official body and
organization from which budget it is paid, as for example the central state and its ministries;
regional and local authorities; separate public bodies and International organizations.
Third, it can also be classified according to the macro factions at whom it is directed;
example in justice and public order; Infrastructures, military system; environmental protection;
and health care. These priorities can be financed independently one from each other or be
integrated and built in complex packages. Therefore Public expenditure plays generally four
main roles of which they are as follows. According to Paine, V (2001).
A. It increases the public endowment of goods for everybody.
B. It gives rise to positive externalities to economy and society as whole or in specific
sectors and geographical areas, the more so through its capital component.
C .It contributes to current effective demand.
D. It expresses a coordinated impulse on the economy, which can be used for
stabilization, business cycle inversion, and growth purposes.
With its prioritized structure and its peculiar decision making processes, it
substantiates the prevailing kind of state. In Democracy, public expenditure is an expression of
people’s will, managed through political parties and institutions. At the same time, public
expenditure is characterized by a high degree of inertia and law dependency which tempers the
will of the current majority. Normally public expenditure can be financed through taxes, public
debt, money emission and International Aid.
 THEORIES ON PUBLIC EXPENDITURE

In the 17 th and the 18th century Public Expenditure was considered as wastage of
money. Thinkers said the Government should stay with their traditional functions of spending on
defense and maintaining law and order. Therefore by the theory of public expenditure we mean
the fundamental rule in accordance with which public expenditure is to be incurred.

Several theories of taxation exist in public economics. Governments at all levels

national, regional, and local need to raise revenue from a variety of sources to finance public
sector expenditures. The details of taxation are guided by two principles: who will benefit, and
who can pay. Hyman, D (2014).

PURE THEORY OF PUBLIC EXPENDITURE

The central issue in the theory is how to determine the proper level and pattern of
public services. It is about how available resources should be divided between the satisfaction of
private and of social wants. Looked at as an economic problem, this immediately poses a second
issue. If resources are to be used for public services or for the satisfaction of social wants, which
private services or satisfaction are to be foregone.

In dealing with this theory of public expenditure, two principles are generally taken
into considerations since the theory relates to those principles which govern optional provision of
public goods. Those principles to be considered are; first the ability to pay principle and second;
the benefit principle. Peacock, A; Wiseman, J (1961)

1. THE ABILITY TO PAY PRINCIPLE

The ability to pay principle; is the principle of taxation which asserts that the
amount of tax levied on economic entity should be directly proportional to the ability of the
entity to pay taxes. Therefore According to the principle, taxes should be based upon the amount
of money people earn. For example those who earn more money are expected to pay a higher
rate of taxes which means a higher portion of their income than people who earns less money.

Normally government imposes taxes to pay for services, like public schools, roads,
police, and governance. But this principle does not take into consideration the amount of these
services that taxpayers actually use. For instance, all taxpayers contribute to public schools, even
if they do not have any kids.

According to Prof Pigou (1920) the ultimate goal of the state is to promote the welfare of the
people. Therefore the public expenditure should be incurred in such a manner that it would lead
to maximizing the good of the maximum number. If public expenditure promotes the welfare of
only the rich or of those who belong to a particular status or religion the rule governing such
expenditure cannot be considered ideal or even good or acceptable. In order to maximize the
utility or satisfaction from their limited income, the individuals should spend money in such a
manner that the expenditure in each direction will bring them an equal marginal utility.

Arguments in favor of ability to pay principle

Here are some of the arguments in favor of ability to pay principle;

(a) Progressive taxes, which follow ability to pay tax principle, can quickly fulfill
the revenue needs or a government and also result in more revenue for government, provided
there is no tax evasion.

(b) The amount of money available to wealthier people far exceeds their basic
necessities and since an average consumer acts rationally, wealthier people derive less and less
additional satisfaction from an additional shilling spent. In other words, the value of a shilling for
a wealthy person reduces as they spend more. The marginal utility per shilling for a poor person
also falls however; it is still much higher than that of a wealthier person.

Arguments against the ability to pay principle

Here are some of the arguments against the ability to pay principle;

(a) Taxes allow the government to offer public goods and services and the
users of those goods and services should pay taxes according to extent to which they use public
goods and services and not on the basis of how much they have earned.

(b) It is difficult if not impossible to determine the ability of a person to pat

taxes. The term ‘ability to pay’ is ambiguous. It leads to questions such as; should taxes be
charged at uniform percentage for all taxpayers or is it going to be a higher percentage on high
income and low percentage on low income?.

BENEFIT PRINCIPLE

The optimal determination of public expenditure on the basis of benefit principle

was given by Duncan K. Foley (1967), in his voluntary exchange theory of public expenditure.
Of which the main point is that “he regards the determination of public expenditure in
connection with the distribution of the corresponding tax burden among the group within the
community”. This is analogous to prices in the adjustment between supply and demand in any
ordinary market.

In this theory the revenue expenditure process as a phenomenon of economic value and
price, is arrived in three-fold decision.

A. Choice must be made between the satisfaction of various wants by private house-holds
before determining the relative distribution of tax burden or shares between various tax-
payers.
B. The second choice is between the satisfaction of alternative wants in the public sector. If
more is spent on defence, then only less can be spent on education.
C. The third choice is to be made between the satisfaction of public wants and private wants
in order to determine the total revenue to be collected and spent. If public expenditure is
lower, taxes will be required in small quality and there will be less curtailment of private
spending.

According to this theory the private economy process is to be followed in the public
economy too. The allocation of the total cost of production of two joint product C and E is done
according to the respective supply prices of the two products based on the demand prevailing for
the two product respectively.

Generally, Erick Lindahl tells us that this principle is bases taxes to pay for public goods
expenditures on a politically revealed willingness to pay for benefits received.
 SAMUELSON ON PUBLIC EXPENDITURE THEORY

Leanne M. Smith (2000), Samuelson explain that public goods cannot be provided by
individuals. They are provided collectively Private goods on the other hand are provided on the
basis of revealed preference but individual preferences are not known in the case of public
goods. Therefore, the market principle cannot be applied to the provision of public goods. In
democratic society the ultimate justification of the government provision of public goods or
other activities is the desire of the members of the society for such action is desirable. It is only
on this assumption that the market principle can be applied to the determination of the optimal
provision and financing of public goods. Samuelson says that efficiency requirement in the case
of private good is one in which the marginal benefit from such good for each individual equals
its marginal cost. Also in case of private good each consumer pays the same price but purchases
different amount of this commodity.

Also Samuelson explain the rule of pricing is the same for public goods and private
goods. This rule says that the price payable for each consumer equal the individual marginal
benefit.

Generally, Leanne M. Smith (Samuelson) says in the world of private goods only
MRS=MRT and MRS equals for all individuals for any pair of two goods. But in world
consisting of both private and public goods, but MRS is different for each individual, thus the
efficiency rule in the case of private goods implies that marginal benefit of such a good for each
individual is equal to its marginal cost.

Musgrave and Rostow's Development Model

The economist, Musgrave, and the economic historian, Rostow, (separately) 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 urbanization).The increasing need in high income
societies for skilled labor leads education to become increasingly an investment good for society
as a whole. Increased population movements lead to the development of urban slums. Such
factors and others lead once again to an increase in public expenditure in relation to total output.
These views are interesting in relation to theories of growth and development but are rather too
general to provide much of a guide to recent experience in developed industrial countries.

Theory of growth of public Expenditure.

Wagner's Law

It is customary in discussions of public sector growth to start with Wagner's law. In 1883,
Adolph Wagner, a German social scientist, put forward an idea which became known as
Wagner's law of increased government activity. The most usual interpretation of this law is that
Wagner thought that there would be an inevitable increase in the share of government
expenditure in total output, although he did recognize some limits to this increase. Essentially, he
was arguing that an expanding government would necessarily accompany social progress and
rising incomes. Such a notion, that societies inevitably change according to particular rules, is an
example of historical determinism.

In thinking about Wagner's law, one has to understand Wagner's view of the relationship
between the state and its citizens - that the state can be seen as existing independently of the
individuals in society and has a general responsibility for society as a whole. This contrasts
strongly with the standard neo-classical view that the state should merely reflect the views of
individual citizens.

Wagner recognized three functions of the state:

(I) Providing administration and protection;

(ii) Ensuring stability; and

(iii) Providing for the economic and social welfare of society as a whole.

According to Wagner, public expenditure on the first of these (which included law and order and
defense) would grow because the increasing division of labor would lead to the breakdown of
communal relationships, requiring the state to take over functions previously carried out by
families and local communities. In the process, administration would become more centralized
and administrative units larger.

The increased division of labor would be accompanied by the development of new technological
processes which would lead to the growth of monopolies in the private sector. In Wagner's view,
private sector monopolies would not adequately take into account the social needs of society as a
whole and would therefore need to be replaced by public corporations. Further, if private sector
companies became too large, the economy would become unstable because problems for
individual companies would become problems for society as a whole. Finally, government would
need to expand to provide social benefits and services which Wagner saw as not open to
economic evaluation. We could include education and health care under this heading.

The principal criticisms of Wagner's law have concerned his view of history and of the
relationship between the state and its citizens. Peacock and Wiseman also queried whether
Wagner's ideas could be applied to all societies at all times and suggested that the time pattern of
actual public expenditure growth did not fit well with Wagner's law.

Wiseman and Peacock hypothesis.

According to Wiseman and Peacock, (1961) the growth of public expenditure does not increase
in a smooth and continuous manner. The increase of public expenditure over time as occurred in
jerks or step-like manner. When societies are not being subjected to unusual pressures, people's
ideas about tolerable burdens of taxation, translated into ideas of reasonable tax rates, tend also
to be fairly stable. Fixed, if low, rates of taxation are obviously compatible with growing public
expenditure if real output is growing, so that there may be some connection between the rate of
growth of real output and the rate of growth of public expenditure. Much more rapid rates of
expenditure growth are unlikely; in settled times, notions about taxation are likely to be more
influential than ideas about desirable increases in expenditure in deciding the size and rate of
growth of the public sector.

There may thus be a persistent divergence between ideas about desirable public spending and
ideas about the limits of taxation. This divergence may be narrowed by large-scale social
disturbances, such as major wars. Such disturbances may create a displacement effect, shifting
public revenues and expenditures to new levels. After the disturbance is over new ideas of
tolerable tax levels emerge, and a new plateau of expenditure may be reached, with public
expenditures again taking a broadly constant share of gross national product, though a different
share from the former one. This displacement effect has two aspects. People will accept, in times
of crisis, methods of raising revenue formerly thought intolerable, and the acceptance of new tax
levels remains when the disturbance has disappeared. It is harder to get the saddle on the horse
than to keep it there. Expenditures which the government may have thought desirable before the
disturbance, but which it did not then dare to implement, consequently become possible.
At the same time, social upheavals impose new and continuing obligations on governments both
as the aftermath of functions assumed in wartime (e.g., payments of war pensions, debt interest,
reparation payments) and as the result of changes in social ideas. Wars often force the attention
of governments and peoples to problems of which they were formerly less conscious—there is an
"inspection effect," which should not be underestimated. Alongside the displacement effect,
there is another influence, called here the concentration process. It is concerned not so much with
changes in the total volume of public expenditures as with changes in the responsibility for such
expenditures. In many societies, the functions of government are shared between a central
authority and other (state and local) authorities whose powers may be protected by statute (as in
legal federations) or conferred by the central government. In such countries local
 REFERENCES.

 Peacock A.T and Wiseman J. (1961) the growth of public expenditure, United Kingdom,
Princeton University press, pg (32)
Retrieved from; (18 may 2016 21:04) Http;//www.nber.org/chapters/c2302

 Pigou C.A,(1920) the economics of welfare, 4th edition, liberty fund inc.
retrieved from L 18 may 2016, 02:38 http:// oll.libertyfund.org/ebooks/Pigou 0316.pdf

 Hyman, D (2014) public finance, a contemporary application of theory to policy, 11 th

edition, United Kingdom, cengage learning publisher.
 Dancan K. Foley (1967), Lindahl’s Solution and the Core of an Economy with Public
Goods (Working Paper HB31.M415 NO. 3) Retrieved from Massachusetts Institute of
Technology
http://www.archive.org/details/lindahlssolution00fole
Leanne M. Smith (2000), A Study of Paul A. Samuelsons Economics: Making
Economics Accessible to Students, Masse University, Palmerston North, NewZealand.
Retrieved from
http://www.ses.unam.mx/docencia/2007II/lecturas/MOD3_samuelson.pdf
 Piane ,V (2001) public expenditure, consumption and other GDP components, United
Kingdom, springer verlag.