Public Expenditure: Causes,

Principles and Importance

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Public Expenditure: Causes, Principles and Importance!

Meaning of Public Expenditure:
Expenses incurred by the public authorities—central, state and local
self- governments—are called public expenditure. Such expenditures
are made for the maintenance of the governments as well as for the
benefit of the society as whole.

There was a misbelief in the academic circles in the nineteenth century

that public expenditures were wasteful. Public expenditures must be
kept low as far as practicable. This conservative thinking died down in
the twentieth century, especially after the Second World War.

As a modern state is termed a ‘welfare state’, the horizon of

activities of the government has expanded in length and breadth. Now
we can point out the reasons for enormous increase in public
expenditure throughout the world even in the capitalist countries
where laissez-faire principle operates. These are the following.
Causes of Increase in Public Expenditure:
(a) Size of the Country and Population:
We see an expansion of geographical area of almost all countries. Even
in no-man’s land one finds the activities of the modern government.

Assuming a fixed size of a country, developing world has seen an

enormous increase in population growth. Consequently, the expansion
in administrative activities of the government (like defence, police,
and judiciary) has resulted in a growth of public expenditures in these
areas.

(b) Defence Expenditure:

The tremendous growth of public expenditure can be attributed to
threats of war. No great war has been conducted in the second half of
the twentieth century. But the threats of war have not vanished; rather
it looms large. Thus, mere sovereignty, demands a larger allocation of
financial sources for defence preparedness.

(c) Welfare State:

The 19th century state was a ‘police state’ while, in 20th and 21st
centuries modern state is a ‘welfare state’. Even in a capitalist
framework, socialistic principles are not altogether discarded. Since
socialistic principles are respected here, modern governments have
come out openly for socio-economic uplift of the masses.

Various socio-economic programmes are undertaken to promote

people’s welfare. Modern governments spend huge money for the
purpose of economic development. It plays an active role in the
production of goods and services. Such investment is financed by the
government.

Besides development activities, welfare activities have grown

tremendously. It spends money for providing various social security
benefits. Social sectors like health, education, etc., receive a special
treatment under the government patronage. It builds up not only
social infrastructure but also economic infrastructure in the form of
transport, electricity, etc.

Provision of all these require huge finance. Since a hefty sum is

required for financing these activities, modern governments are the
only providers of money. However, various welfare activities of the
government are largely shaped and influenced by the political leaders
(Ministers, MPs, and MLAs to have a political mileage, as well as by
the bureaucrats (MPLAD)).

(d) Economic Development:

Modern government has a great role to play in shaping an economy.
Private capitalists are utterly incapable of financing economic
development of a country. This incapacity of the private sector has
prompted modern governments to invest in various sectors so that
economic development occurs.

Economic development is largely conditioned by the availability of

economic infrastructure. Only by building up economic infrastructure,
road, transport, electricity, etc., the structure of an economy can be
made to improve. Obviously, for financing these activities, government
spends money.

(e) Price Rise:

Increase in government expenditure is often ascribed to inflationary
price rise.

Types of Public Expenditure:

Public expenditure may be classified into developmental and non-
developmental expenditures. Former includes the expenditure
incurred on social and community services, economic services, etc.
Non-developmental expenditure includes expenditures made for
administrative service, defence service, debt servicing, subsidies, etc.

Public expenditure is classified into revenue expenditure and capital

expenditure. Revenue expenditure includes civil expenditure (e.g.,
general services, social and community services and economic
services), defence expenditure, etc. On the other hand, capital
expenditure comprises expenditures incurred on social and
community development, economic development, defence, general
services, etc.

Public expenditure may also be classified as plan expenditure and

non-plan expenditure.

Non-plan expenditure falls under two broad heads, viz., revenue

expenditure and capital expenditure. The former comprises interest
payments, defence expenditures, subsidies, pensions, other general
services (like health, education), economic services (like agriculture,
energy, industry, transport and communication, science, technology
and environment, etc.)

Expenditures on agriculture, rural development, irrigation and flood

control, energy, industry and mineral resources, etc., are included in
plan expenditure.

Principles Governing Public Expenditure or Canons of Public

Expenditure:
Rules or principles that govern the expenditure policy of the
government are called canons of public expenditure. Fundamental
principles of public spending determine the efficiency and propriety of
the expenditure itself. While making its spending programme,
government must follow these principles. These principles, in short,
are called canons of public expenditure.

Findlay Shirras has laid down the following four canons of

public expenditure:
(i) Canon of benefit

(ii) Canon of economy

(iii) Canon of sanction

(iv) Canon of surplus

(i) Canon of Benefit:

According to this canon, public spending has to be made in such a way
that it confers greatest social benefits. In other words, public
expenditure must not be geared in such a way that it provides benefits
to a particular group of the community. Thus, public expenditure is to
be made in those directions where general benefits rather than specific
benefits flow in.

However, often public expenditure is incurred for the benefit of a

particular group (say, dalits, tribals). This sort of public expenditure
does not violate canon of benefit. Any public expenditure for the
development of a backward area does promote social interest.

(ii) Canon of Economy:

Economy does not mean miserliness. It refers to the avoidance of
wasteful and extravagant expenditure. Public expenditure must be
made in such a way that it becomes productive and efficient. Efficiency
in public expenditure requires economy of expenditures. To enjoy the
maximum aggregate benefit from any public spending programme, it
is necessary that the canon of economy is observed.

An uneconomic expansion in public expenditure will result in scarcity

of funds, the much-needed growth of the productive sectors will be
hampered. This means lower social benefit. It is thus obvious that the
canon of economy is not independent of the canon of benefit.

(iii) Canon of Sanction:

The canon of section, as suggested by Shirras, requires that public
spending should not be made without any concurrence or sanction of
an appropriate authority. Arbitrariness in public spending can be
avoided only if spending is approved. Further, economy in public
spending can never be ensured if it is not sanctioned.

(iv) Canon of Surplus:

This canon suggests the avoidance of deficit in public spending. Like
individuals, saving is a virtue for the government. So the government
must prepare its budget in such a way that government revenue
exceeds government expenditure so as to create a surplus. It must not
run deficit to cover its expenditure.

However, modern economists do not like to attach any importance to

Shirras’ fourth canon— the canon of surplus. To them, deficit
financing is the most effective means of financing economic
programmes of the government.
Importance of Public Expenditure:
An old-fashioned dictum says that “The very best of all plans of
finance is to spend little, and the best of all taxes is that
which is least in amount.” No one today believes this philosophy.
In the 1930s, J. M. Keynes emphasized the importance of public
expenditure.
The modern state is described as the ‘welfare state’. As a result, the
activities of the modern government have widened enormously.
Modern governments are undertaking various social and economic
activities, particularly in less developed countries (LDCs).
i. Economic Development:
Without government support and backing, a poor country cannot
make huge investments to bring about a favourable change in the
economic base of a country. That is why massive investments are
made by the government in the development of basic and key
industries, agriculture, consumable goods, etc.

Public expenditure has the expansionary effect on the growth of

national income, employment opportunities, etc. Economic
development also requires development of economic infrastructures. A
developing country like India must undertake various projects, like
road-bridge-dam construction, power plants, transport and
communications, etc.

These social overhead capital or economic infrastructures are of

crucial importance for accelerating the pace of economic development.
It is to be remembered here that private investors are incapable of
making such massive investments on the various infrastructural
projects. It is imperative that the government undertakes such
projects. Greater the public expenditure, higher is the level of
economic development.

ii. Fiscal Policy Instrument:

Public expenditure is considered as an important tool of fiscal policy.
Public expenditure creates and increases the scope of employment
opportunities during depression. Thus, public expenditure can prevent
periodic cyclical fluctuations. During depression, it is recommended
that there should be more and more governmental expenditures on
the ground that it creates jobs and incomes.

On the contrary, a cut-back in government’s expenditure is necessary

when the economy faces the problem of inflation. That is why it is said
that by manipulating public expenditure, cyclical fluctuations can be
lessened greatly. In other words, variation of public expenditure is a
part of the anti- cyclical fiscal policy.

It is to be kept in mind 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 or the quality of expenditure. The quality of expenditure
determines the adequacy and effectiveness of such expenditure.
Excessive expenditures may cause inflation.

Moreover, if the government has to impose taxes at high rates there

will be loss of incentives. So, it is necessary to avoid unnecessary
expenditure as far as practicable, otherwise benefits of better
economic development may not be reaped. As a fiscal policy
instrument, it may be counter-productive.

iii. Redistribution of Income:

Public expenditure is used as a powerful fiscal instrument to bring
about an equitable distribution of income and wealth. There are good
much public expenditure that benefit poor income groups. By
providing subsidies, free education and health care facilities to the
poor people, government can improve the economic position of these
people.

iv. Balanced Regional Growth:

Public expenditure can correct regional disparities. By diverting
resources in backward regions, government can bring about all-round
development there so as to compete with the advanced regions of the
country.
This is what is required to maintain integration and unity among
people of all the regions. Unbalanced regional growth encourages
disintegrating forces to rise. Public expenditure is an antidote for these
reactionary elements.

Thus, public expenditure has both economic and social objectives. It is

necessary to ensure that the government’s expenditure is made solely
in the public interest and does not serve any individual’s interest or
that of any political party or a group of persons.