Public Expenditure and Debt

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Questions and Answers

What is primarily emphasized by the principle of maximum social advantage?

Government expenditure should exceed revenue collection.

Government should maximize taxation without limits.

A balance between taxation and government expenditure is essential. (correct)

Public services should be funded solely by private investments.

Which principle focuses on ensuring judicious spending of collected revenue?

Principle of Maximum Aggregate Benefit

Principle of Economy (correct)

Principle of Elasticity

Principle of Sanction

What does the principle of maximum aggregate benefit assert regarding public revenue and expenditure?

Public revenue and expenditure must be balanced to yield maximum satisfaction. (correct)

Expenditure should always be higher than revenue.

Revenue should be maximized without consideration of public satisfaction.

Satisfaction is derived only from minimization of public expenditure.

Which of the following is NOT one of the four key obligations of public utilities?

The duty to impose high rates Signup and view all the answers

What characteristic should public authorities possess according to the principle of elasticity?

Ability to vary expenditure according to needs Signup and view all the answers

What is the main purpose of public expenditure?

To maintain and promote the welfare of the economy Signup and view all the answers

What distinguishes developmental expenditure from non-developmental expenditure?

Developmental expenditure promotes economic growth. Signup and view all the answers

Which hypothesis suggests a relationship between industrialization and the growth of public expenditure?

Wagner’s Hypothesis Signup and view all the answers

Which factor does NOT contribute to the growth of public expenditure according to Wagner's Hypothesis?

Reduction of social welfare measures Signup and view all the answers

Which of the following is considered a new responsibility that governments began to assume?

Expansion of welfare measures Signup and view all the answers

What impact does population growth have on public expenditure according to the content?

It requires extensive state functions to be performed. Signup and view all the answers

Which of the following statements about public goods is true?

There is recognition of the need for budgetary allocation for public goods. Signup and view all the answers

What type of public expenditure is considered non-recurring?

Capital expenditure Signup and view all the answers

Which of the following is NOT one of Adam Smith's main duties for the sovereign?

Ensure economic growth Signup and view all the answers

Which factor is NOT mentioned as a cause for the increase in public expenditure?

Technological advances Signup and view all the answers

Which of the following is NOT a category of capital expenditure?

Public debt Signup and view all the answers

What is identified as a major contributor to public expenditure in the current century?

War and preparation of war Signup and view all the answers

What is one of the roles of government highlighted by Prof. R.A. Musgrave?

Redistributing wealth Signup and view all the answers

Which of the following is a type of revenue expenditure?

Interest on public debt Signup and view all the answers

Which scenario is less likely to lead to an increase in government expenditure?

A decline in population. Signup and view all the answers

Why is the expansion of the public sector a cause for increased public expenditure?

To provide more social services and infrastructure Signup and view all the answers

What is one consequence of urbanization on public spending?

Increased expenditure on civil administration Signup and view all the answers

How does per capita income relate to public expenditure according to Musgrave?

A rising share of public expenditure is associated with rising per capita income Signup and view all the answers

What does economic planning suggest about the public sector?

Increase in public sector and efforts for economic growth Signup and view all the answers

What is a main critique of Wagner's hypothesis on public expenditure?

Inability to account for war influences Signup and view all the answers

What are the effects highlighted in the Wiseman and Peacock hypothesis concerning public expenditure growth?

Increases during times of social disruption Signup and view all the answers

What characterizes public goods in economic theory?

Public goods are non-rival and non-excludable Signup and view all the answers

Which criterion is used to determine the optimal allocation between public and private goods?

Pareto criterion and social welfare function Signup and view all the answers

What does the concept of rivalry in public goods imply?

Multiple consumers face limitations in consuming the same good Signup and view all the answers

Study Notes

Public Expenditure: Meaning and Importance

Public expenditure includes government expenses for maintenance, preservation, and welfare of the economy.
Major drivers for the increase in public expenditure are increased economic activities and impacts on economic life.

Adam Smith’s Duties of the Sovereign

Protect society from violence and external invasions.
Safeguard against injustice.
Erect and maintain essential public works.

Adolph Wagner’s Law of Increasing State Activity

Introduced in the late 19th century emphasizing expanding governmental roles in society.

Prof. R.A. Musgrave’s Advocacy for Public Expenditure

Governments must perform several activities:
- Reallocation of resources.
- Redistribution of income.
- Stabilization policies.
- Commercial activities.

Importance of Public Expenditure

Catalyzes economic development.
Serves as a fiscal policy instrument.
Aids in income redistribution.
Promotes balanced regional growth.

Causes for Increased Public Expenditure

Emergence of welfare states.
Escalating defense expenditure.
Growth of democratic governance.
Rising population numbers.
Inflation and rise in price levels.
Expansion of the public sector.
Development-focused expenditure.
Public debt accumulation.
Grants and loans to state governments.
Poverty alleviation initiatives.

Classification of Public Expenditure

Revenue Expenditure: Current and recurring expenses, categorized in the revenue budget.
Capital Expenditure: Non-recurring expenses linked to capital investments and development, includes:
- Developmental outlay.
- Non-developmental outlay.
- Loans and advances.
- Debt discharge.

Developmental vs. Non-Developmental Expenditure

Developmental Expenditure: Aims to foster economic growth.
Non-Developmental Expenditure: Includes spending on national security, law enforcement, and debt servicing.

Theories of Growth of Public Expenditure

Adolph Wagner’s Hypothesis: Correlation between industrial growth and public sector expansion.
Wiseman and Peacock Hypothesis: Public expenditure grows in increments due to social disruptions like wars or economic crises.
Pure Theory of Public Expenditure: Focus on the characteristics of public goods.

Adolph Wagner’s Hypothesis Explained

Suggests traditional state functions have expanded due to economic development, social progress, and the need for public goods.
War and preparation for it significantly influence public expenditure.
Urbanization and rising population increase the scope and cost of government activities.

Criticism of Wagner’s Hypothesis

Lacks interdisciplinary approach.
Fails to account for short-term expenditure patterns.
Overlooks modern influences like war.

Wiseman and Peacock Hypothesis Characteristics

Public expenditure increases as a response to crises, suggesting spending grows in discrete steps rather than a continuous pattern.

Principles of Public Expenditure

Maximum Social Advantage: Balance taxation and spending for optimal societal benefit.
Maximum Aggregate Benefit: Achieve maximum satisfaction by balancing revenue and expenditure.
Economy Principle: Ensures judicious spending of taxpayer funds.
Sanction Principle: Unapproved spending leads to overspending dangers.
Elasticity Principle: Expenditure should adjust flexibly based on needs.

Pricing of Public Utilities

Public utilities provide essential services like electricity and water, significant for socio-economic development.
Subject to regulation to fulfill societal obligations, including serving all consumers and avoiding discrimination.

Obligations for Public Goods

Duty to serve all consumers equitably.
Provide adequate service to meet consumer needs.
Charge reasonable rates for services.
Ensure no unjust discrimination in service provision.

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Description

This quiz explores the concepts of public expenditure as defined in Module III. It covers its meaning, importance, and the reasons for its increase, particularly in relation to economic activities and their impact. Gain a deeper understanding of the governance responsibilities outlined by Adam Smith in 'The Wealth of Nations'.

Public Expenditure and Debt - Module III