Concept of Public Expenditure
“Public expenditure refers to the expenses of the public authorities – central, state and local governments – either for protecting the citizens and/or for promoting their economic and social welfare.” - Sundharam and Andley
“Public expenditure refers to the expenses which the government incurs for its own maintenance as also for the society and the economy as a whole. These days governments are also incurring expenditure to help other countries.” - Bhatia.
There are two schools of thoughts or attitudes in relation to the scope of public expenditure. The first is led by Adam Smith and other by classical writers restricted state activities to mainly the primary functions. Adam Smith has pointed out ‘the sovereign has only three duties: protecting the society from violence and invasion from other independent societies; establishing the exact administration of justice; and erecting and maintaining certain public works and certain public institutions.'
J.B.Say said, “The very best of all plans of finance is to spend little.”
H.Parnell says, “Every particle beyond which necessity absolutely requires for the preservation of social order and for protection against foreign attack is waste and unjust oppressive imposition on the public.”
The second school of attitude after 1880’s did not restrict public expenditure only to the primary functions. Writers like Pigou, Dalton advocated public expenditure on social welfare activities. Similarly, after 1930’s depression, writers like Keynes advocated for state role to control economic fluctuations for maintaining economic stability in the developed countries. Prof. Musgrave advocated public expenditure for the activities such as: reallocation of resources, redistribution of national income and wealth, stabilization of economy, and some necessary commercial activities.
Reasons for Growth in Public Expenditure
Public expenditure in all countries is increasing throughout the passes of time. In this regard, Adolf Wagner, a noted German fiscal theorist, propounded an empirical law named as ‘Law of the increase of state activities’ in the late 19th century. The law is expressed as, “Comprehensive comparisons of different countries and different times show that an increase regularly takes place in the activity of both the central and local governments. This increase is both extensive and intensive. The governments constantly under-take new functions, while they perform both old and new functions more efficiently and completely.”
Similarly, the Italian economist F.S. Nitti observed that whatever be the nature of governments or nations, they have similar tendencies towards marked increase of public expenditure.
The factor behind the increase in state activities, and thus, the public expenditure are of different nature and purposes. They are:
1. Concept of welfare state
In the past, governments were restricted to perform minimum activities just to maintain an environment necessary for efficient working of the private sector economic activities being guided by the market mechanism. Now, governments are to perform so many activities to promote social welfare beside the traditional activities. There is no sphere where the state can not enter or undertake. The basic reason for this is the change in the philosophy of police-state until late 19th century to the welfare-state with the main objective of promoting socio-economic well-being of the citizens. It has been the responsibility of the state to take care of citizens from womb-to-tomb, and so, expenditure of modern governments has increased a lot.
2. War related activities
War and threat of war have compelled governments to be militarily strong with well equipped weapons and technology. The cost of defense due to the progress in war techniques along with the development of science and technology have made the war weapons highly expensive. And also, the rate of obsolesce of the weapons is extremely high. Besides, war obligations for governments even in peace time after war in the form of pensions, relief aids to war veterans and victims, repayment of war debt and reconstruction of war devastated infrastructures.
3. Growth of population
Population growth, mainly in the underdeveloped countries, has necessitated increase in government activities to fulfill the demand for more educational, health, housing, employment opportunities, social security and benefits.
4. Urbanization
The process of urbanization impose additional responsibilities upon governments to provide community benefit which are normally not possible from individual efforts. Such community benefits like supply of safe drinking water, sewage facility, link roads, public parks, sports and recreation centers, communication networks, public security services, etc. are to be provided by the governments.
5. Economic needs
The great depression of 1930’s recognized the need for state intervention in the economy. Accordingly, undertaking of new economic functions by the state to maintain economic stability, encourage economic activities and promotion of economic welfare have increased the volume of public expenditure in the developed countries. In the developing countries, after the Second World War, governments are to play the leading role in the development process performing the role of an investor, facilitator and regulator along with promotion of distributive justice, maintenance of economic stability and environmental protection. All these economic needs have caused increase in public expenditure a lot.
6. Rise in price level
Universal rise in price level has led to increase in public expenditure for purchasing the goods and services by the governments. There is a cause and effect relationship between increase in price level and public expenditure.
7. Political factors
Modern governments have to make expenses on the political institutions, organizations and constitutional bodies. The system of election in the democratic countries needs more expenses. In an authoritarian regime, governments are spending a huge amount to suppress the political opponents and voices, and popularizing the image of the ruler through propaganda.
8. Growth in international relations
Establishment of international organizations like UNO and many agencies under its regional co-operation organizations like European Union, ASEAN, SAARC, OAU, BIMSTEC, etc. have made the member countries to subscribe financial contribution for their operation, expenses on permanent and conference delegates. Besides, establishment of diplomatic missions and the practice of foreign aids are also responsible for increase in expenditure of modern governments.
Principles of Public Expenditure
Principles of public expenditure are the criterion or guidelines for making public expenditure decisions. Prof. Alfred Buckler has made an attempt to state some guidelines for public expenditure to be followed by public authorities. They are:
- Public expenditure should promote welfare of the society, even it may be to promote welfare of a particular class or group.
- Careful judgment should be exercised to ensure the advantages of expenditure on each public service exceed the costs in comparison to that from the private sector.
- Priority should be given to services that will best promote social welfare than the services that promote least social welfare.
The principles of public expenditure can be discussed as the Canons of Public Expenditure and the Principle of Maximum Social Advantage. The canons of public expenditure are accepted as the general guiding principles for overall public expenditure mechanism. The principle of maximum social advantage is accepted as the basic principle of public expenditure.
Canons of Public Expenditure
Prof. Findlay Shirras advocated the following canons of public expenditure:
- Canon of Benefit- The ideal of public expenditure should be the promotion of maximum social benefit or advantage.
- Canon of Economy- It refers to be economical in spending public money as well as help to expand its revenue base.
- Canon of Sanction- It implies that there should be no public expenditure without proper sanction by the proper authority.
- Canon of Elasticity- It refers that public expenditure should be changeable as per the need of the country.
- Canon of Equitable Distribution- It implies that public expenditure should be carried out to reduce the inequality in national income distribution.
- Canon of Productivity- It implies that public expenditure should encourage increase in national production.
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