Public Expenditure | UGC NET Economics – Notes

Introduction

• In simple terms, public expenditure implies the money that a government spends on various activities that signify the collective needs and wants such as education, health, housing, pension etc..

• In earlier times, before the nineteenth century, scholars of public finance did not pay adequate attention to public spending because their activities were quite limited. With the increase in the size of the government, it became essential that public expenditure is to be guided by proper guidelines, rules, laws, and principles.

• All activities in government need funds for their execution. So, public expenditure refers to the expenses which the government incurs for its own maintenance as well as for the economy.

• Over the last few decades, globally, there has been a significant increase in public expenditure. The policies formulated for public expenditure are envisaged to accelerate economic growth, promote opportunities for employment and orchestrate reduction in poverty.

Meaning of Public Expenditure

• Public expenditure indicates the money spent by government of a country on realising the collective wants of the people. It is incurred to provide social goods, increase production, promote price stability and balanced growth, reduce income inequalities and so on. John Maynard Keynes made a case for important role of public expenditure in determining the levels of income and distribution in the economy.

• The study of public expenditure and its operationalisation has come to be known as public expenditure management which relies on the role of institutional arrangements in influencing budget outcomes. It covers areas such as:

  • fiscal discipline;

  • resource allocation; and

  • operational efficiency.

• Public expenditure management has become an important subject of study because during the eighties, many governments faced financial crisis of different nature creating a wide disparity between the expenditure and revenue. This has led to a rise in fiscal deficit and inflation. Monetary imbalances impacted the exchange rates resulting in macroeconomic uncertainty and low investment. Public expenditure management is related to reducing debt, stimulating the growth rate of wages to achieve lower rates of inflation, and increasing investment from internal as well as foreign sources and ultimately leading to higher economic growth.

• The essential components are:

  • focus on performance;

  • linkages between policymaking, planning and budget;

  • well-functioning accounting and financial management systems; and

  • expedient and favourable links between budgeting and other systems of the government.