Public Expenditure :

Public expenditure refers to the expenses incurred by the public authorities – central government, state government and local bodies – for its own maintenance as also for meeting of collective needs of citizens and / or for promoting economic and social welfare.

In the modern welfare state, the government has to undertake a number of economic and social activities for which it has to incur expenditure.

Public expenditure needs to be incurred in

In providing social security to the public (like old age pensions)
In providing economical and social overheads( like transportation, communication and power etc.)
In maintaining economic stability,
In providing welfare activities (like education, medical, housing etc)
In promoting economic development.
In running the government like expenditure on administration and maintenance of law and order.

Types of Public Expenditure:

There are mainly three classifications of public expenditure :

1. Direct expenditure and Indirect Expenditure

2. Developmental and Non developmental Expenditure

3. Productive and Non Productive Expenditure

1. Direct and Indirect Expenditure:

Direct Expenditure:

The expenditure incurred by the government on the purchase of goods and services and on current services of factors of production is called government direct expenditures.

Government may use these goods and services for consumption purpose or for investment purposes.

Thus, this type of expenditure represents government’s purchase of some part of the economy’s output of final goods and services.

It is also called exhaustive expenditure or non transfer expenditure.

The expenditure on defence, education, health and judiciary etc. are non transfer expenditure as in return for these government obtains the services of army personnel, teachers, doctors etc.

Investment expenditure is undoubtedly non transfer expenditure as through it government obtains capital goods.

Indirect or Transfer Expenditure:

Transfer expenditures are those which takes the form of payments which are made without corresponding returns of goods and factor services to the government.

Against these kinds of expenditures, there is no corresponding transfer of real resources i.e. goods and services to the government.

These payments do not generate current production and are in the nature of transfer payments.

Expenditure incurred on old – age pensions, unemployment allowance, sickness benefits, interest on public debt during a year etc. are examples of transfer payments because the government does not get any service or goods against them in the particular year.

2. Developmental and Non developmental Expenditure:

On the basis of the nature of various functions of the government, public expenditure can be classified as –

a. Developmental Expenditure

b. Non developmental Expenditure

a. Developmental Expenditure:

These expenditure are those which is incurred in promoting economic and social development of the country.

Developmental expenditure includes :

In providing social and community services such as education, scientific services, public health, labour and employment.
In providing economic services such as transport and communication.
In giving grants in aid to state government for development purposes
In incurring expenditure on agriculture and industrial development.

b. Non developmental Expenditure:

These expenditures are that expenditures which is incurred on non developmental activities of government in the form of provision of essential general services of the government.

Non developmental expenditure includes –

In providing administrative services such as police, defence, administration of justice, general administration.
Interest payments.
Pensions and other types of retirement benefits
Grants to state government for non developmental purposes.

3.Productive and Non Productive Expenditure:

a. Productive Expenditure:

Productive expenditure are those expenditure which help in improving the productive capacity of the economy.

These expenditures are of the nature of investment.

These expenditure add to the productive efficiency of the economy.

These expenditure includes: on physical assets like machinery, factories as well as expenditure on human capital like education, training, health etc.

b. Non productive Expenditure:

Non productive expenditures are those expenditure which do not add to the productive efficiency of the economy directly.

They are in nature of consumption expenditure.

These expenditures includes : on administration, defence, justice, maintenance of law and order etc.

It doesn’t mean that these expenditure are wasteful, but these expenditure may indirectly add to the health and efficiency of the economy.

Importance of Public Expenditure: Effect of Public Expenditure:

Public expenditure if spent properly, exerts an important influence on the entire economy. The importance of public expenditure can be explained from the following facts:

1. Effect of Public Expenditure on Production:

Public expenditure on defence, administration and development activities creates demand for various types goods and services and thereby creates income for those individuals and firms who produces these goods. This also increase the purchasing power of the people.

Public expenditure on education, medical services, sanitation and cheap housing facilities increases the productive efficiency of the people at a large, which leads to increase in production and income of the people.

Public expenditure can be used to create human skills through education and training.

Public expenditure on producing essential raw material and other inputs in public sector, helps in removing various shortages,like shortages of steel and fertilisers, so as to ensure smooth production.

Public expenditure on social security schemes like old age pension, unemployment allowances, sickness benefits, free education, medical facilities etc. increases the purchasing power of low income groups and hence their ability to work.

2. Effect of Public Expenditure on Investment:

Public expenditure on maintenance of law and order creates confidence in the minds of the investors and hence it encourages them to undertake investment.

Public expenditure on creation and maintenance of economic overheads like power, irrigation, transport and communication would motivate the producer to undertake investment.

Public expenditure on creation of social overheads helps in formation of human capital.

Government may provide financial assistance and subsidies to the private sector and thereby stimulate investment. Example, subsidised fertilisers and electricity has helped in the development of agricultural sector in India.

3. Effect of Public Expenditure on Income Distribution :

The objective of maximum social welfare can be achieved only when the inequality of income is removed or minimised. Government expenditure is very useful to fulfill this goal.

Government collects excess income of the rich through income tax and sales tax on luxuries. These funds are then used in welfare measure like free education, free medical facilities and social security schemes like old – age pensions, unemployment allowance etc. to help poor.

Public expenditure on subsidies on articles of common consumption like – food grain can also help poor and improve income distribution.

Government expenditure on subsidies and financial assistance given to the producers to set up industries in the backward regions, also help remove inequalities and improve income distribution.

4. Effect of Public Expenditure on Economic Growth :

Public expenditure on developing economic overheads and infrastructure by establishing capital goods industries, basic and key industries directly promote economic development in the country.

Public expenditure on education, training and research facilities indirectly stimulate the economic development.

Public expenditure on free education, training, public health and social security schemes increases efficiency and skill of people and thereby contribute in economic development.

Public expenditure in the form of subsidies can help in stimulating agricultural and industrial growth.

Public Expenditure and Economic Stability:

Economic instability is a characteristic features of free market economies. These economies usually suffer from business cycles, which is characterised by alternating periods of boom and depressions.

According to Keynes, public expenditure policy can be effectively used as an anti cyclic instrument from establishing economic stability.

Depression which is characterised by low level of income and high level of unemployment, is caused by deficiency of aggregate demand.

During the period of depression the government is expected to raise its expenditure.

Increase in public expenditure, in the form of direct public investment on a massive scale will add directly to aggregate demand in the economy and will result in increase in output and employment.

On the other hand, the period of boom, which is characterised by rise in prices and inflation is caused by excess demand.

There is a need of curbing excess demand by reducing public expenditure while maintaining the same level of taxation and borrowing.

Therefore, public expenditure can be used as a compensatory expenditure device, i.e., compensating for the deficiency or excess of aggregate demand. Government expenditure can be used as a balancing factor in order to maintain economic stability.

Public Expenditure : Types and Importance – Fiscal Policy Class 12 Economics

Public Expenditure :

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