Two main branches of public finance, namely, public revenue and public expenditure, we shall first study the public expenditure. The classical economists did not analyse in depth the effects of public expenditure, for public expenditure throughout the nineteenth century was very small owing to the very restricted Government activities.
The Governments followed laissez faire economic policies and their functions were only confined to defend the country from foreign aggression and to maintain law and order within their territories. But now, the expenditure of Government all the world over has greatly increased. Therefore, the modern economists have started analysing the effects of public expenditure on production, distribution and the levels of income and employment in the economy.
Importance of Public Expenditure:
Thanks to the macroeconomic theory advanced by J.M. Keynes, the role of public expenditure in the determination of level of income and its distribution is now well recognised. Keynesian macroeconomics provides a theoretical basis for recent developments in public expenditure programmes in the developed countries.
The public expenditure can be used as a lever to raise aggregate demand and thereby to get the economy out of recession. On the other hand, through variation in public expenditure, aggregate demand can be managed to check inflation in the economy.
Public expenditure can also be used to improve income distribution, to direct the allocation of resources in the desired lines and to influence the composition of national product. In the developing countries also, the role of public expenditure is highly significant.
In the developing countries, the variation in public expenditure is not only to ensure economic stability but also to generate and accelerate economic growth and to promote employment opportunities. The public expenditure policy in developing countries also plays a useful role in alleviating mass poverty existing in them and to reduce inequalities in income distribution. In what follows, we shall study the types of public expenditure, the causes of growth of public expenditure and its effects on production, distribution and economic growth in both the developed and the developing countries.
Classification of Public Expenditure:
Revenue Expenditure and Capital Expenditure:
Public expenditure has been classified into various categories. Firstly, Government expenditure has been classified into revenue expenditure and capital expenditure. Revenue expenditure is a current or consumption expenditure incurred on civil administration (i.e., police, jails and judiciary), defence forces, public health and education.
This revenue expenditure is of recurrent type which is incurred year after year. On the other hand, capital expenditure is incurred on building durable assets. It is a non-recurring type of expenditure. Expenditure incurred on building multipurpose river projects, highways, steel plants etc., and buying machinery and equipment is regarded as capital expenditure.
Transfer Payments and Expenditure on Goods and Services. Another useful classification of public expenditure divides it into transfer payments and non-transfer payments. Transfer payments refer to those kinds of expenditure against which there is no corresponding transfer of real resources (i.e., goods and services) to the Government.
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.
On the other hand, expenditure incurred on buying or using goods and services is a non-transfer payment as against such an expenditure, the Government receives goods or services. It is therefore called expenditure on goods and services. It may be noted that expenditure on defence, education, health etc., are non-transfer expenditure as in return for these, Government obtains the services of army personnel, teachers, doctors etc., as well as some goods or equipment’s used in these activities.
Investments expenditure is undoubtedly non-transfer expenditure as through it Government obtains capital goods. It is worthwhile to mention that whereas in case of transfer payments, it is the beneficiaries that decides about the use of resources, in the case of non-transferable type of expenditure, the Government itself decides about the use of real resources, especially whether they are to be used for consumption or investment purposes.
Developmental and Non Development Expenditure:
Another useful classification of public expenditure rests on whether a particular expenditure by the Government promotes development. All those expenditures of Government which promote economic growth are called developmental expenditure.
Expenditure on irrigation projects, flood control measures, transport and communication, capital formation in agricultural and industrial sectors are described as developmental. On the other hand, expenditure on defence, civil administration (i.e., police, jails and judiciary), interest on public debt etc., are put into the category of non-development expenditure.
It may be noted that, till recently, expenditure on education and health were regarded as non-developmental type. It has now been realised that the expenditure on education and public health promotes the growth of what is called human capital which promotes economic growth as much as physical capital, if not more. Therefore, these days, expenditure on education, research and health are generally regarded as developmental expenditure.
It is worth noting that division of Government expenditure into developmental or non-developmental is the modern counterpart of the distinction drawn by classical economists between productive and unproductive public expenditure, which has been a subject of great controversy.
For instance, it has been pointed out that even Government expenditure on defence and civil administration helps to maintain conditions in which productive activity can be carried out. It is, therefore, claimed by some that indirectly, expenditure on defence and civil administration is also productive.
Thus, we see that what Government expenditure is developmental or productive and what non-developmental or unproductive is not based on any objective or fool-proof criteria and is therefore somewhat arbitrary.
Growth of Public Expenditure:
Public expenditure has phenomenally increased all the world over. A pertinent question is what the causes of this phenomenal growth are in public expenditure. It will be useful to discuss this with reference to India. This is because the factors responsible for a large increase in public expenditure over time in India are generally applicable to other countries too. It will be interesting to mention here two laws about the growth of public expenditure.