Let us make an in-depth study of the subject matter, categories and principles of public/government expenditure.
Government Expenditure Subject Matter:
In order to carry on their functions, governments must obtain the services of labour and other factor units and (except in a completely socialist economy) acquire goods produced by private business firms.
Public expenditure consists of expenditure by the central government and state governments, local authority (such as municipalities and public corporations), with central government accounting for the major portion of such expenditure. Thus the central government is required to maintain good roads, bridges, defence activities, canals and harbours, to protect trade, to maintain the coinage and to provide social security, education and religious instruction.
Categories of Government Expenditures:
Government expenditures can be classified into several categories. First, some outlays are for direct government purchases of goods and services. Purchases of goods and services include government expenditures on the services of individuals, such as those in the armed forces, and on goods, such as food, medicine schools, hospitals, highways, and motor cars. Many of the purchases the government makes are for goods and services that are provided for all members of the society — including those who have not paid for then use.
When a good or service is provided for everyone and no one can be excluded from its use, it is termed a public good. Flood control and national defence systems are examples of public goods. When government provides a good or service that could be sold in a private market, such as education or fire protection, it is providing a quasi-public good. The provision of public and quasi-public goods is a widely recognised function of the government.
A second category of government expenditure is transfer payments, which are payments from the government for which nothing is received in return. Social security benefits, compensation to unemployed people, benefits to senior citizens and pensions to retired government employees and freedom fighters are all examples of transfer payment programmes.
Interest paid on borrowed funds is another type of government expenditure. At times, government units finance some of their activities through borrowing, and the interest on those borrowed funds is an expense that the government unit must meet.
The government may also incur expenses for running or contributing to the operation of various public enterprises such as toll roads, airports, and hospitals, or for providing intergovernmental grants. These grants are given primarily by the Central Government to State and Local Governments.
The main heads of Central Government’s revenue expenditure are:
(i) Defence Services,
(ii) Development Services,
(iii) Administrative Services,
(iv) Debt Services, and
(v) Assistance to States.
They account for nearly 20% of the total revenue expenditure of the Central Government in India.
The expenditure on civil administrative services as also on tax collection, police, pensions, etc. come under this heading.
Social and Development Services:
Expenditure on social and development services are now the most important head of Central Government’s revenue expenditure and fall into the following two broad groups of services:
(a) Social and Community services, which seek to improve and build-up the human capital and social infrastructure of the country; and
(b) Economic Services, which are directed toward the development and strengthening of the economic infrastructure and other economic activities in the country.
India has been raising more and more loans — both internal and foreign — for the execution of its development plans. So it has to pay interest on borrowed funds.
The Principles of Public Expenditure:
Public expenditure refers to the expenditure incurred by the Central Government. There are different types of such expenditure. The usual distinction is between consumption expenditure and investment expenditure. Another distinction is between revenue expenditure and capital expenditure.
Public expenditure is likely to have beneficial effect on society, i.e., reduction of income inequality, control of business cycles, and achievement of foil employment and so on.
It is guided by the following five principles:
1. Economic Development:
A developing country like India must undertake various projects such as road and bridge construction, irrigation dams, power plants and so on. These constitute infrastructure of the economy or social overhead capital and are of vital importance for accelerating the pace of economic development. Investment in such projects is so high and return from them is so low that private investors do not undertake such projects voluntarily.
The government usually takes a long view of the economy’s requirements. So it is imperative that the government undertakes such projects. In India and other developing countries, such development projects are undertaken through the planning system.
2. Fiscal Policy:
Public expenditure creates jobs and incomes during depression and unemployment. This is why Keynes advocated the policy of increasing public expenditure for creating effective demand and thus helping the economy to achieve foil employment.
Contrarily, a cut-back in government expenditure is necessary when the economy faces the problem of inflation. Such variation in public expenditure is necessary to control business cycles or to stabilise the economy. So, variation of public expenditure is a part of the anti-cyclical fiscal policy.
3. Maximum Social Advantage:
One of the objectives of a modern government is to achieve the social goal of income equality. For this, it is necessary to reduce poverty and inequality. This is why the government transfers incomes or purchasing power from one section of society to another through various tax-subsidy measures. The government collects revenue, mainly, by imposing taxes and selling bonds. The money raised in the process is utilised to pay wages and compensation of government employees and the suppliers of various materials to government departments and public sector undertakings.
Moreover, in a modern mixed economy, payments are made to certain sections of society without requiring them to provide anything to the government in exchange. Such payments are called transfer payments. Examples are unemployment compensation, widow pensions, subsidies (concessions) to the freedom fighters, payments to needy families, the handicapped and so on.
Moreover, outright subsidies are also paid to the small farmers, artisans and other weaker sections of society at the cost of the tax-payers. Such measures are to taken to improve the existing pattern of income distribution or for reducing income inequality.
Since the marginal (extra) utility of every rupee to a poor man is much greater than that to a rich man, appropriate use may be made of fiscal (i.e., the government’s combined revenue- expenditure) policy to secure maximum social advantage. However, care has to be taken to ensure that taxes are not too high to have unfavourable effects on incentives to produce, earn and save.
Richard Musgrave has suggested that the government should use public expenditure- cum-tax policy to maximise society’s welfare, i.e., to secure the maximum possible net advantage. This implies that the government should make the difference between the benefit of public expenditure and social cost involved in raising the money (to finance the expenditure) as large as possible.
However, in practice, it is very difficult to measure or quantify social welfare.
It may also be noted, in this context, that it is not just the amount of public expenditure that is incurred which is of importance to the economy. What is equally — if not more — important is the purpose of such expenditure.
The use or purpose of such expenditure determines the adequacy and effectiveness of such expenditure. Excessive expenditure may cause inflation. Moreover, if the government has to impose taxes at high rates, there will be loss of incentives (mainly due to the present system of progressive taxation). So it is necessary to avoid unnecessary expenditure to the maximum possible extent.
It is very important to drastically curtail or totally avoid wasteful expenditure that causes uneconomic use of resources.
There are two ways of securing such ‘economy’ in government expenditure:
(1) The annual budget of the Central Government must lay down the amount to be spent for particular purposes and the government servants or departments should not be permitted to spend in excess of the budgetary allocations.
(2) As soon as the budget grants are spent, the accounts are to be scrutinised by the Public Accounts Committee of the Parliament.
5. Avoidance of Harmful Effects:
Finally, it is of considerable importance to ensure that government expenditure does not have any injurious effect on production and distribution. It is equally vital to ensure that the government expenditure is solely in the public interest and does not serve any private interest or that of any group of persons.