This does not mean that government costs nothing, but that the benefits outweigh the costs. Role of Public Expenditure in A Developing Country 1. Scholarly research indicates that America is on the downward sloping portion of the Rahn Curve -- as are most other industrialized nations. It has to spend more on various facilities and services provided by the Government. India has to maintain a large army and modernise its armed forces.
To avoid becoming an uncompetitive European-style welfare state like France or Germany, the United States must adopt a responsible fiscal policy based on smaller government. Here the flow of income is concentrated to the richer class. Robinson classified public expenditure into productive and unproductive. Effect of Public Expenditure on National Output at Times of Depression : Developed economies often find themselves in the grip of a depression or recession caused by lack of aggregate effective demand. In order to reduce inequalities of income, the State has to spend a large sum on free and cheap medical aid, subsidised food and housing, free education.
Defence, and police service, justice, roads, irrigation, flood control projects, public parks etc. These social overhead capital or economic infrastructures are of crucial importance for accelerating the pace of economic development. 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. Investments in shares and loans and advances granted by the central government are part of this. This in turn will benefit public revenue considerably. This incapacity of the private sector has prompted modern governments to invest in various sectors so that economic development occurs.
Similarly public expenditure can able to control the resources into various uses and locations. Expenditure on these schemes has greatly risen in recent years. Table 1 shows Reagan's impressive performance compared to other Presidents, measured by the real inflation-adjusted growth of federal spending. The Public expenditure is discussed in some articles also. Keynesian macroeconomics provides a theoretical basis for recent developments in public expenditure programmes in the developed countries. Dalton classifies public expenditure into two categories — grants and purchase price.
As public investment is rising as plans roll on, government expenditure is also rising. These functions are further divided into subsidiary functions. Meaning and Scope of Public Expenditure: Till the middle of the nineteenth century, the writers of Public Finance gave comparatively little attention to the subject of public expenditure. Hicks states it is more logical to start with public expenditure. 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. The first and foremost evil effect is that it adversely affects incentives to work and save of the people. Effects of Public Expenditure : Public expenditure is an important fiscal instrument to secure many fold social objectives in an economy.
Servicing of Public Debt : Public debt constitutes a substantial part of the government revenue; a major part of mounting government expenditure is met from public borrowing. These are the same as productive expenditure. Why should a person set aside income if government programs finance these big-ticket expenses? In the social accounting sense, non-transfer expenditure always gives rise to creation of output and equivalent money income. It is mostly financed by raising loans, internal or even external. However, the sphere of state activity is dynamically changing in recent years.
The government provides educational services, both general and technical and training of manpower. It includes expenditure on defence, maintenance of law and order, civil administration, payment of debt etc. If the revenue collected from the taxpayer is heedlessly spent, it would be obviously uneconomical. In countries like India which have socialistic tendencies the public sector plays an important role in promoting economic growth and development. Government expenditure was considered as compensatory factors in maintaining the level of trade and employment especially during economic depression. In fact, such order had been blatantly ignored. Portions of the federal budget are used to finance activities that generate a distinctly negative effect on economic activity.
It is the nature or pattern of expenditure that explains the causes of rising of government expenditure. Voluntary Exchange Theory of Lindhal for Determination of Public expenditure. Owing to past contracts and other legal commitments, coupled with the concept of sovereignty, the state is not free to decide whether to incur this type of expenditure or not. Hence the diversion of resources from private to public sector for the construction of basic infrastructure and for preservation and conservation of scarce resources is very essential for economic development. .
The belief of the classical economists, in the efficacy of Laissez-fair capitalism in maintaining full employment and economic stability has been falsified. Dalton give a practical or empirical classification. Broadly, the principle of maximum social advantage should be the underlying criteria of public spending. However, there is evidence that the private sector could provide these important services at a higher quality and lower cost. This will widen the gulf between two classes and by inequality in the society. In this way economic needs of the people to an increasing extent and in a more satisfactory fashion, are satisfied by the central and local Governments. Not all types of public expenditure reduce inequalities in income distribution.