CHAPTER THREE

PUBLIC EXPENDITURE
3.1. Introduction
PE is incurred by public authorities - either for the satisfaction of collective needs of the citizens
or for promoting their economic and social welfare. It is incurred by the government for the
attainment of public good. Every government has to maintain law and order, armed forces for
providing protection, schools, health of the people, arranging for cheap food, cloth and low-cost
housing for the poor and so on. All these mixed activities which are increasing every year require
huge funds. Therefore public expenditure, deals with the expenditure which a government incur
for its own maintenance, the society and the economy and helping other countries.
Current and Capital Expenditure
• Technically, in the structure of a budget, most governments classify public expenditure
into two:
(i) Current expenditure, and
(ii) Capital expenditure
 Current expenditures
 They are also referred to as non-developmental expenditure.
 All sorts of administrative and defense expenditure
 They are intended for continuing the existing flow of and services and
maintaining the capital of the country whole.
 Capital expenditures
 Capital expenditures contribute to increased productive capacity of the nation.
 They are also known as development expenditure.
 Example: Expenditures on construction of dams, public works, state enterprises,
agricultural and industrial development.
3.2. Objectives of Public Expenditure
• Dr. Dalton divided the aims of public expenditure into two parts:
(i) Security of life against the external aggression and internal disorder and injustice.
(ii) Development or up gradation of social life in the community.

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  The public authority works in many ways for the benefit of the people. The government
organizes the generalized services like public health and education. The whole society is
benefited by these functions of the state.
 Secondly, in modern times, the responsibilities of the government are increasing every
year. Though, through public expenditure the government influences directly or
indirectly, the industrial and commercial system of the nation thereby helps towards the
economic and social development of the society.
 Public spending should be designed to optimize the level of investment in such a way as
to maintain full employment--with growth.
 Public spending may be incurred at an increasing rate in the backward region to uplift
their economy.
Reasons for Growing Expenditure
1. Population growth. The growth in the numbers particularly in developing countries
has been a major cause of the continuous rise in public expenditure. Along with
growth in the numbers, the responsibility of government relating to public services
has been multiplied. To check the growth of population, again, the government has to
incur a huge expenditure.
2. Increasing urbanization. As the rural areas cannot subsist the growing population,
there is a continuous rush to the urban areas. The size of cities is becoming larger and
larger, while newer urban habitations are springing up. The maintenance of
complexity of life has, therefore, become costlier and the government has to squarely
face the problem.
3. Maintenance of law and order. Along with the growth of population, urbanization
and complexities of modern economic and sociopolitical life, law and order problems
have also multiplied. The government responsibilities of internal protection of people
from breach of peace by antisocial elements have gradually become multi-sided
requiring government expenditure of more and more funds.
4. Welfare activities. Previously, public expenditure was limited by only a few functions
of government, viz, the defense, maintenance of law and order and administration.
But, presently, the countries have emerged as modern welfare states where the
greatest good of the greatest number is the main objective of statehood. The

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 government now has to assume such responsibilities as family and child welfare,
social security like old age pension, unemployment benefit, sickness benefit, etc.
housing for the poor, welfare of handicapped and backward classes, rehabilitation of
displaced persons, subsidy on food and production inputs, etc. Public expenditure on
welfare programmes has, therefore, become tremendous with the passage of time.
5. Provision of public goods and utility services. Public goods are those that are
consumed equally by all. They cannot be sold in the private market. Defense and
police services, justice, roads, irrigation and flood control projects, public parks, etc.
are all examples of public goods. They involve huge investment and have to be
provided by the government. Moreover, there hasbeen a growing trend of public
utility services like railways and other transport services, postal, telegraph and
telephone services, electricity services, etc. Coming under the government sector.
They all involve heavy expenditure on installation and maintenance.
6. Servicing of public debt. A substantial part of the huge expenditure program of
government is met from public borrowings. This is because resources cannot be
mobilized from taxation beyond a limit. Hence, modern states incur considerable
internal and external public debt. The repayment of debt and obligation to pay service
charges become huge.
7. International obligation. Finally, the modern states have to maintain many
international socio-political and economic links. They have to maintain diplomatic
relations, economic links with international institutions like I.B.R.D. ( the
International Bank for Reconstruction and Development), I.M.F. ( International
Monetary Fund) etc, Socio-cultural and academic exchange relations, linkage with
development programs of the type of economic co-operation, gifts and donations,
regional economic integration and membership of other international organization
like UNO (United Nations Organization), etc – all these involve a considerable
amount of public expenditure.
8. Defense:-Due to the invention of nuclear weapons there is always a danger of foreign
aggression. International political situation is uncertain and insecure. As such, every
nation has to prepare itself for a strong defense. The defense expenditure in the form

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 of expenditure on war materials, maintenance and growth of armed forces, pension to
retired war personnel etc. are, are perpetually rising.
9. Transport and Communication: With the expansion of trade and commerce, the state
has to provide and maintain a quick and efficient transport system. Transport being a
public utility, the state has to provide it cheaply also. The government has to spend a
lot on constructing new railway lines, good roads, new roads, highways, bridges and
even canals to connect different areas with a smooth transport system as a
precondition of growth.
10. Rising Trend of Prices: Public expenditure is also increasing in every country due to
rising trend of prices. The reason is that the government has to buy goods and
services from the market at higher prices. The government has also to increase the
salaries, dearness allowance etc., of government employees leading to a rapid
increase in government expenditure.
11. The Rural Development Effect: In an underdeveloped country, the government has
also to spend more and more for rural development. It has to undertake schemes like
community development projects and social measures. The government also incurs
expenditure on imparting training to personnel for implementing rural development
programmers.
2.3. CANONS OF PUBLIC EXPENDITURE
It used for the fundamental rules or principles governing the spending policy of the government.
According to Prof. Findley Shirras, the canons are:
1. Canon of Benefit. Public expenditure should be so planned and implemented as to bring
about the greatest possible benefit to society. This canon is simply a reminder to the
public authorities that whatever they spend they should do it according to the principle of
maximum social advantage. What it means is that all such expenditures which do not
bring benefit to society should be avoided. Thus, all non-essential expenditures should be
cut to the minimum. Benefit from public expenditure may be identified with achievement
of proper allocation of economic resources, proper distribution of income and wealth in
society and stability of price level and growth of economy. This canon also points to the
need of undertaking a cost-benefit analysis of the competing schemes of public
expenditure before the final selection of investment project is made.

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 2. Canon of economy. Public expenditure should be incurred carefully so that there is no
wastage of funds. Since resources are limited in the society, they have to be most
properly utilized. Economical use means most proper utilization. Hence the canon
remains a constant reminder that resources must not be misused or wasted. Most
important reasons of wasteful expenditure are faulty planning, faulty execution, corrupt
practice and delay due to time lag between plan and execution and, hence, escalation of
prices. These types of wastage have to be avoided at any cost. It must be noted here that
benefit to society cannot come without proper pursuit of the canon of economy.
3. Canon of sanction: These cannon suggest that no public spending should be made
without the approval of proper authority. Only obtaining prior sanction is not sufficient. It
must be properly inspected and examined whether the sanctioned amount of money is
being spent properly on sanctioned items or not. As a rule, therefore, money must be
spent on the purpose for which it is sanctioned by the highest authority and accounts
properly audited.
4. Canon of surplus. This canon requires that expenditure of public authorities should be
kept within the limits of current revenues. If possible, the expenditure should be less than
the earnings of government so that the surplus so generated can be used when there is
unavoidable deficit. Surplus can be generated either by controlling expenditure or by
increasing current revenues. Of late, however, there has been much change in the
thinking around budget policy. The occurrence of depression and the need for achieving
price stability and economic growth often requires deficit financing, i.e. excess of
expenditure over current revenues. Hence, a choice of surplus or deficit budget is decided
by the merit of the case. This canon is, however, an important reminder of the fact that
the government should not overspend and run into debts and that a deficit spending
should be avoided as far as possible.
5. Canon of elasticity. Canon of elasticity requires that the rules of public expenditure
should not be too rigid to achieve the real purpose and that it should be allowed to vary
according to the needs and circumstances. For example, if the economy suffers from
unemployment and deficiency of demand, there should not be a rigidity that the budget
should be balanced. Under such situation, the government should go for a deficit budget
and inject additional purchasing power into the economy so that effective demand is

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 increased and factors of production are employed on larger scale. Or in case of emergent
situations like flood relief, sanctioning authority should be vested with the lower rank
spending unit since there is no time to secure sanction from higher authorities. Flexibility
of expenditure should be provided under such circumstances.
6. Canon of Productivity: This canon or principle implies that the expenditure policy of the
Governments should be such that would encourage production in a country. That means a
large part of public expenditure must be allocated for development purpose.
7. Canon of Equity: One of the foremost aims of public expenditure is also to ensure the
just and equitable distribution of is more significant for the countries where the gap
between the highest income and the lowest income groups is very wide. Underdeveloped
countries like India, have given this aim a significant and particular importance in the
economic activities of the State and in their fiscal polices.
8. Canon of certainty. This canon requires that public authorities should clearly know the
purpose and extent of public expenditure. The spending unit should be certain as to the
amount and objective of public expenditure. This requires a proper expenditure plan well
thought out beforehand. The canon of certainty is followed through the preparation of
budget. The budget details the amount and purpose of expenditure for the whole financial
year. It is through the budget that the spending authorities have proper knowledge of the
use of public funds. In the absence of such a certainty, fiscal discipline cannot be
maintained and there will be unnecessary wastage and overspending.
3.5. IMPACT OF PUBLIC EXPENDITURE
In modern government Public Expenditure regarded as a means of securing social ends. Public
Expenditure produces many direct and indirect socio-economic effects.
 The effects of public expenditure;.
Effects of public expenditure on production.
1. Effects upon ability to work, save and invest
Ability to work, save and invest depends upon the health and efficiency possessed by the
persons. Health and efficiency depends upon the level of consumption and level of consumption
depends upon the public expenditure incurred by the government. Public expenditure on
education, medical services, cheap housing facilities, means of transport and communication etc,
will increase the efficiency of persons to work. Some of the expenditure, like the expenditure on

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free education, unemployment benefit and free medical facilities etc., are helpful in increasing
the purchasing power of the people especially of the low income groups and hence it helps to
protect and promote the efficiency of the people and their ability to work and save. Public
expenditure on increasing the salaries and wages of the people and the supply of goods and
articles at cheap rates to them will increase their purchasing power, standard of living, health,
efficiency and hence their ability to work and save may increase.
Likewise, public expenditure on the maintenance of law and order, creates confidence in the
minds of the people and hence it encourages them to make investment in productive activities.
As production increases, income of the people also increases; hence their ability to work, save
and invest also goes up. Thus it is evident that public expenditure can promote ability to work,
save and invest and thus promote production and employment.
2. Effects upon willingness to work, save and invest
Public expenditure also affects the willingness of the people to work, save and invest. Pension,
provident fund, interest loan, free medical and unemployment allowances and other government
payments provide security to a person and, therefore, reduce the willingness of persons to work
and save, when a person knows that will be looked after by the government when he is not in a
position to earn any income. In the absence of any saving, the question of investment does not
arise at all.
On the contrary, expectation of larger amenities and higher standard of living would stimulate
people to work hard. It is this encouragement which would encourage them to save more and to
invest their savings for production purposes. Expenditure on benefits such as sickness benefits
would certainly increase the desire of the people to work more, since they are assured of relief if
they fall sick due to hard work.
3. Effects on diversion of resources
Public expenditure also affects the diversion of resources. Government incurs public expenditure
in the form of giving financial assistance to productive sector. In the same way, if the
government wishes to attract productive resources to a particular area or region, it will start
giving variety of incentives in the form of tax holidays and other allowances or concessions etc.
to the industrialists.
Effects of public expenditure on distribution

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Public expenditure also helps the government in bringing about equitable distribution on income
and wealth. Not only taxation policy but public expenditure policy can also remove inequalities
in the distribution of income and wealth. To bring about equitable distribution of income and
wealth, the government should impose higher taxes on the richer section of society and the
amount realized from them should then be spent on the poorer section of society by way of
providing social amenities, and subsidies to them. Public expenditure has, thus, an important role
in reducing economic inequalities in the society.
Effects of public expenditure on employment
Public expenditure affects employment as well as employment opportunities. It can increase
employment in the country. Therefore, the public expenditure policy of the government should
be so devised as to create additional jobs both in the public and private sectors. The following
expenditures of the government increase employment opportunities.
1. Heavy expenditure in the public sector
For the economic development of the country, the government should make investment in public
sector such as heavy engineering, iron and steel coal etc. Production goods sector provides direct
employment to the people by creating millions of jobs. Thus it clearly becomes the responsibility
of the state to prevent a situation of unemployment.
2. Expenditure on public utilities
Public expenditure incurred by the government on public utilities, such as supply of water,
electricity, telephone services, etc., create a large volume of employment.
3. Public expenditure to encourage small-scale industries
To promote employment in small-scale industries, the government should provide tax incentives
and allowances to such industries. The government should incur public expenditure on small-
scale sector in the form of cheap credit, supply of raw materials at concessional rates, free
technological assistance, helping these industries in the marketing of goods etc. In this way,
large employment is created in the small-scale sector.
4. Public expenditure to create employment in backward areas
To create employment opportunities in back ward regions, the government should promote
industries in the public sector and private sector in backward areas. To encourage industries in
the public as well as private sectors, the government should grant deductions and concessions to
such industries. If public expenditure is directed towards the promotion of industries in the

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public and private sectors in backward areas, not only will additional jobs be created, but the
markets will be also widened and there will be all round economic development of the country.
5. Effects of public expenditure on economic stability
Economic stability is judged by the behavior of prices. Price stability is related to the manner in
which price behaves in an economy. There should be a normal rise in price because normal is
considered as a sign of a healthy economy problem arises whenever there are price fluctuations.
Price fluctuations may be known as abnormal economic situations.
There may be 2 state of abnormal price behavior:
(i) Inflation,
(ii) Deflation or depression, and
1. Effects of public expenditure in Inflation
Inflation is a state of rising money supply, rising demand but stable supply. Public expenditure
may be useful in controlling inflation. In this situation the aim of the government should be to
spend than its revenue. Inflation may be averted by reducing public expenditure on civil services,
defense, interest payments etc. The funds acquired by means of a surplus budget may be used to
provide capital to those sectors which experience shortage of capital so that the total productive
capacity of the economy may increase. Therefore, public expenditure should be incurred on
minor irrigation projects, better quality of seeds, manure, etc., in the field of agriculture. In the
field of industries, public expenditure may be incurred on providing facilities for the
establishment of new industries and for the expansion of the existing ones.
2. Effects of public expenditure in deflation/depression
Depression is a state of falling price, falling money supply and falling demand. Falling prices
cause losses among business-men and manufactures and this leads them to curtail production and
employment. Thus, a large number of workers are thrown out of employment. In such a
situation, the government should employ workers on public works projects. The employed
workers receive wages from the government and can thus increase the demand for various
commodities. The increased demand leads to increase in production. Thus, the objective of
public expenditure during depression should be to create effective demand for consumer goods,
which would create employment and thus, would help to maintain economic stability.