Public Expenditure and Debt PDF

MODULE III PUBLIC EXPENDITURE AND DEBT PUBLIC EXPENDITURE: MEANING AND IMPORTANCE Refers to the expenses incurred by the government for its maintenance, preservation, and welfare of the economy.  TWO MAJOR REASONS FOR THE INCREASE IN PUBLIC EXPENDITURE 1. Increased...

MODULE III PUBLIC EXPENDITURE AND DEBT PUBLIC EXPENDITURE: MEANING AND IMPORTANCE Refers to the expenses incurred by the government for its maintenance, preservation, and welfare of the economy.  TWO MAJOR REASONS FOR THE INCREASE IN PUBLIC EXPENDITURE 1. Increased Economic Activities 2. Impact on Economic Life ACCORDING TO THE WEALTH OF NATIONS 1776, BY ADAM SMITH THE SOVEREIGN HAS THREE MAIN DUTIES TO PERFORM AS 01 TO PROTECT THE SOCIETY FROM VIOLENCE AND INVASION OF OTHER INDEPENDENT SOCIETIES 02 TO PROTECT AGAINST INJUSTICE AND 03 ERECTING AND MAINTAINING CERTAIN PUBLIC WORKS. IN THE LATE 19TH CENTURY ADOLPH WAGNER, A GERMAN ECONOMIST, INTRODUCED THE LAW OF INCREASING STATE ACTIVITY IN 20TH CENTURY PROF. RA MUSGRAVE ADVOCATED PUBLIC EXPENDITURE SINCE A GOVERNMENT IS FORCED TO DO MANY ACTIVITIES SUCH AS ACTIVITIES TO SECURE A REALLOCATION OF 01 RESOURCES 02 REDISTRIBUTION ACTIVITIES, 03 STABILIZING ACTIVITIES AND 04 COMMERCIAL ACTIVITIES.  IMPORTANCE OF PUBLIC EXPENDITURE ECONOMIC DEVELOPMENT I II FISCAL POLICY INSTRUMENT III REDISTRIBUTION OF INCOME IV BALANCED REGIONAL GROWTH CAUSES FOR THE INCREASE IN PUBLIC EXPENDITURE I WELFARE STATE II DEFENSE EXPENDITURE III GROWTH OF DEMOCRACY IV GROWTH OF POPULATION V RISE IN PRICE LEVEL CAUSES FOR THE INCREASE IN PUBLIC EXPENDITURE VI EXPANSION PUBLIC SECTOR VII DEVELOPMENT EXPENDITURE VIII PUBLIC DEBT GRANTS AND LOANS TO STATE GOVERNMENTS IX AND UT’S X POVERTY ALLEVIATION PROGRAMS  CLASSIFICATION OF PUBLIC EXPENDITURE: a)Revenue expenditure is current expenditure. Revenue Budget or Revenue Account Revenue Receipts b) Capital expenditure is of capital nature and is incurred once for all, it is a non-recurring expenditure.  CLASSIFICATION OF PUBLIC EXPENDITURE: Capital Expenditure includes a) Developmental Outlay b) non-developmental outlay c) Loans and advances and d) Discharge of debts.  CLASSIFICATION OF PUBLIC EXPENDITURE: Capital Account Capital Receipts include a) Borrowings b) Recovery of loans and advances c) Disinvestments and d) Small savings.  DEVELOPMENTAL AND NON- DEVELOPMENT EXPENDITURE: Developmental All government expenditures that promote economic growth. Non- Developmental Focused on maintaining national security, law and order, and the functioning of the legal system, as well as servicing debt. THEORIES OF GROWTH OF PUBLIC EXPENDITURE THERE ARE THREE IMPORTANT AND WELL KNOWN THEORIES OF GROWTH OF PUBLIC EXPENDITURE. I ADOLPH WAGNER’S HYPOTHESIS II WISEMAN AND PEACOCK HYPOTHESIS III PURE THEORY OF PUBLIC EXPENDITURE  ADOLPH WAGNER’S HYPOTHESIS Adolph Wagner a noted German political economist (1835-1917) propounded an empirical law to analyze and explain the trend in the growth of public expenditure. Wagner argued that a functional, cause and effect relationship exists between the growth of an industrializing economy and the relative growth of its public sector.  1.EXPANSION OF TRADITIONAL FUNCTION Traditional functions mainly include defence, administration of justice, maintenance of law and order and provision of social overheads.  2.COVERAGE OF NEW FUNCTIONS Traditionally the state activities were limited to only defence, justice, law and order, maintenance of the states over heads etc. But with the growing awareness of its responsibilities to the society, the governments started expanding its activities in the field of various welfare measures to enrich the cultural life of the society.  3.SOCIAL PROGRESS Social progress leads to a growth in government function which in turn leads to the absolute and relative growth of governmental economic activity.  4.EXPANDING SPHERE OF PUBLIC GOODS The need and necessity to provide social and merit goods through budgetary allocation was increasingly recognized by the modern state. The state was trying to shift the composition of national product more in favour of public goods.  5.WAR AND PREPARATION OF WAR The most important contributory factor in incurring the public expenditure in the current century is war. Expenditure on national defence generally accounts for half and at times even more than half of the total budget expenditure.  6.GROWTH OF POPULATION A high growth of population naturally calls for increase in the expenses as all State functions are to be performed more extensively. Rising population also poses various problems in poor countries.  7.URBANIZATION The spread of urbanization is an important factor leading to the relative growth of public expenditure in modern times. With the growth of urban areas, there has been an increasing tendency of expenditure on civil administration.  8.RISE IN PRICES AND NATIONAL INCOME According to Musgrave, a rising share of public expenditure in national income is associated with a rise in per capita income.  9.ECONOMIC PLANNING AND GROWTH The ideals of economic planning and growth are being increasingly accepted. This implies an increase in public sector as also various efforts on the part of the government towards capital accumulation and economic growth.  10.SPECIALIZATION The nature and size of public services now need specialisation. The quantity of the services improves, both as a historical fact as also due to circumstantial compulsions.  CRITICISM OF WAGNER’S HYPOTHESIS: Wagner's hypothesis on public expenditure lacks an interdisciplinary approach and comprehensiveness, fails to account for the influence of war, and relies on an outdated theory of the state, overlooking significant short-term patterns in expenditure growth.  THE WISEMAN AND PEACOCK HYPOTHESIS Public expenditure grows in discrete, step-like increments rather than steadily, driven by major social disruptions such as wars or economic crises. Their model highlights three effects: displacement, where crises lead to permanent increases in spending; inspection, which exposes revenue shortfalls; and concentration, where central government activities expand relative to total public spending.  PUBLIC THEORY OF PUBLIC EXPENDITURE Public goods are non rival and non excludable Excludability- the ability of producers to detect and prevent uncompensated consumption of their product.  PUBLIC THEORY OF PUBLIC EXPENDITURE Rivalry- the inability of multiple consumers to consume the same good. To determine the optimal allocation between public and private goods, economists use the Pareto criterion and a social welfare function to evaluate and choose the best solutions.  PRINCIPLES OF PUBLIC EXPENDITURE 1 PRINCIPLE OF MAXIMUM SOCIAL ADVANTAGE 2 PRINCIPLE OF MAXIMUM AGGREGATE BENEFIT 3 THE PRINCIPLE OF ECONOMY 4 THE PRINCIPLE OF SANCTION 5 THE PRINCIPLE OF ELASTICITY  PRINCIPLE OF MAXIMUM SOCIAL ADVANTAGE Taxation(government revenue) and government expenditure are the two tools. Neither of excess is good for the society, it has to be balanced to achieve maximum social benefit  PRINCIPLE OF MAXIMUM AGGREGATE BENEFIT Maximum satisfaction should be yielded by striking a balance between public revenue and expenditure  THE PRINCIPLE OF ECONOMY The principle requires thy the revenue collecting from the tax-payer should be judiciously spent.  THE PRINCIPLE OF SANCTION It usually sees that unauthorizing spending leads to extravagance and overspending.  THE PRINCIPLE OF ELASTICITY It should be possible for public authorities to vary the expenditure according to need circumstances. It means that they should be fairly elastic and flexible but not rigid.  PRICING OF PUBLIC UTILITIES Unique form of business organization. Public utilities are essential businesses providing vital services such as gas, electricity, water, transport, and communication, playing a crucial role in socio- economic development  PRICING OF PUBLIC UTILITIES These utilities are subject to different levels of regulation to ensure they meet societal needs The concept of public utility is defined by four key obligations: serving all consumers, delivering adequate service, charging reasonable rates, and avoiding unjust discrimination. 4 OBLIGATIONS THAT ARE ESSENTIAL FOR A PUBLIC GOODS 1 THE DUTY TO SERVE ALL CONSUMERS 2 THE DUTY TO RENDER ADEQUATE SERVICE 3 THE DUTY TO SERVE ALL REASONABLE RATE THE DUTY TO SERVE WITHOUT UNJUST 4 DISCRIMINATION