Classification of Government Expenditure : Components of Govt. Expenditure

Classification of Govt. Expenditure:

Budget expenditure is the estimated expenditure to be incurred by the govt. during a given financial year.

Public expenditure is classified into plan and non plan expenditure. Both plan and non plan expenditure are further classified into revenue and capital expenditure. Each of these expenditure is sub – divided into developmental and non developmental expenditure.

Classification of Government Expenditure : Components of Govt. Expenditure - Economics Class 12

Plan and Non Plan Expenditure:

a. Plan Expenditure:

Plan expenditure is the expenditure incurred on various projects and programmes covered under the current five year plan.

It represents the current development and investment outlays on the schemes and projects under the current five year plan.

Though plans have a framework of five years, allocations for the projects covered under the plans are made annually out of the annual budget for each of the five years of the plan.

b. Non Plan Expenditure:

Non plan expenditure covers all expenditures other than the expenditure related to the current five year plan.

It refers to the government expenditure which is incurred on items other than development programmes covered under the plan.

Both Plan and Non Plan Expenditures are further subdivided into Revenue and Capital Expenditures.

a. Revenue Expenditure:

All those expenditures which do not create any physical or financial assets or do not reduce liability are treated as revenue expenditure.

They are the expenditures related to normal functioning of the government departments and provision of various government services.

These expenditures are incurred to maintain the general services of the government like defence, law and order, administration and to provide various social services (education, health etc.) and economic services (agriculture, industry, power, transport and communication etc).

They also include interest payments on market loans and external loans.

Revenue expenditure is of recurring nature which is incurred year after year.

b. Capital Expenditure:

Capital expenditures are those expenditures of the government which lead to creation of physical or financial assets or reduction of liabilities.

These expenditures are incurred on acquisition of assets land and buildings, machinery, equipments, purchase of shares etc.

Capital expenditures also includes expenditure incurred in giving loans to state governments, union territories and foreign governments public enterprises etc.

Capital expenditure is non recurring type of expenditure.

All these types of public expenditures whether plan or non plan, revenue or capital can be classified into developmental and non developmental expenditure:

a. Developmental Expenditure:

Expenditures a incurred on activities which are directly related to economic and social development of the country are called developmental expenditures.

Expenditures incurred on the development of various sectors like agriculture, industry, education, health etc. are regarded as developmental expenditures.

They also includes loans and grants – in – aid to the states and the union territories for developmental purpose.

b. Non – Developmental Expenditures :

Non developmental expenditures are those expenditures which are incurred in providing essential general services by the government.

These expenditures are incurred on the provision of general services by the government expenditures incurred on defence and administrative services, interest payments, pensions and retirement benefits etc. are some examples of non developmental expenditures.

It also includes loans and grants to state government for non – development purposes.

Question: Differentiate between :

Revenue expenditures and Capital expenditures.
Plan Expenditures and non plan expenditures
Developmental and non developmental expenditures.

Answer :

Revenue Expenditure Vs. Capital expenditures :

Basis	Revenue Expenditure	Capital Expenditure
Meaning	The estimated expenditure of the govt. that does not affect the assets and liabilities status of the govt.	The estimated expenditure of the govt. that affects the assets and liabilities status of the govt.
Appears in	Revenue Expenditure appears in Trading and Profits and Loss accounts.	Capital Expenditure appears in Balance Sheet.
Nature	Revenue expenditure is recurring in nature.	Capital expenditure is non -recurring in nature.
Purpose	Revenue expenditure is made for the normal functioning of the govt. departments ad the provision of various services.	Capital expenditure is made mainly for the acquisition of assets and for granting loans and advances.
Tends to	Revenue expenditure tends to maintain the earning capacity.	Capital expenditure tends to increase the earning capacity.
Benefits	Revenue expenditures provide benefits for an accounting year.	Capital expenditures provide benefits for several years.
Examples	Pension, salaries, Interest etc.	Expenditure on acquisition of capital assets, repayment of borrowings etc.

2. Plan expenditures Vs. Non Plan expenditures:

Basis	Plan Expenditure	Non – Plan Expenditure
Meaning	The expenditures incurred on the programs that are detailed in the current five year plan of a country.	The expenditures incurred on programs that are other than those detailed in the current five year plan of a country.
Incurred on	Plan expenditures are spent on the current development and investment outlays.	Non plan expenditures are spent on the routine functioning of the government.
Arises when	The plan expenditures are arise only when the plans say so about such expenditures.	Non -plan expenditures are must for every economy and the government can not escape itself from the expenditure.
Examples	Expenditures on energy, irrigation, communication, Transport and Agriculture.	Expenditure on defence services, Payment of interest, Expenditures on administrative services.

3. Developmental expenditures Vs. Non developmental expenditures:

Basis	Developmental Expenditure	Non Developmental Expenditure
Meaning	The expenditure which is related directly to the economic and social development of the country.	The expenditure incurred on the important general services of the govt.
Related to	These are expenditure on activities that are directly related to economic and social growth or development of the country.	These are the expenditure on activities that are not related to the growth or development of the country but are for providing general services of the govt.
Flow of goods and services	It adds to flow of goods and services and thus increases the income and employment in the country.	It does not directly adds to the flow of goods and services.
Impact on development of economy	These expenditures have a direct impact on the development of the country’s economy.	These expenditures have an indirect impact on the development of the country’s economy.
Objectives	In the case of developmental expenditure definite objectives are set which can be achieved in a fixed duration of time.	In the case of non – developmental expenditures it is impossible to set objectives and achieve them in a fixed duration of time.
Share of Expenditure	The share of these expenditures are gradually increasing in the economy.	The share of these expenditures are gradually decreasing in the economy.
Nature	Developmental expenditures are productive in nature as it adds to the flow of goods and services.	Non developmental expenditures are not concerned with the working class’s productivity.
Examples	a. Plan expenditures on departmental enterprises like Railways, Post & Telegraph b. Plan expenditures on non departmental enterprises Like Air India, Indian Airlines.

c.
Loans given to non -departmental enterprises,
local bodies and other parties for developmental purposes.

a.
Interest Payment
b.
Subsidies on food and controlled clothes
c.
Expenditure on defence or Police.
d.
Expenditure on tax collection.

e.
Loans for non – developmental purposes.

Classification of Government Expenditure : Components of Govt. Expenditure – Economics Class 12

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