Public Expenditure (Economics): Principles and Importance

Public Expenditure is an important concept in Economics. Lets take a closer look at its causes and important principles.

What is Public Expenditure?
Public expenditure is the expenditure incurred by the central, state and local governments to satisfy the common wants of people such as education, health, administration, defence, infrastructure (roads, trains) etc.

Most of the expenditure happens on (or is due to) things like Growth of population, Defence expenditure, Administrative machinery, Planning & economic development, Urbanization, Rural development, Welfare state, Interest payment, Subsidies, Inflation, Natural calamities.

Let’s take a look at the major causes of public expenditure.

Growth of population

With increasing population the govt. has to spend more on various public services like schools, offices, housing, sanitation, police, education, health etc.

Defence Expenditure

One of the important functions of a govt. is to defend the country from foreign aggression. Increasing defence expenditure is a serious problem for developing countries like India because of its geography and also because of its relations with neighbours (like Pakistan). It has to spend large proportion of GDP on maintaining Air force, Navy and Army. The risk of terrorist attacks has increased this expenditures.

Administrative Machinery

The number of ministries and government departments has increased over the years in India. India is the largest democracy in the world. A democratic country has to spend large amount of money on elections and democratic institutions at central, state and local levels. It has to spend on legislatures, parliament, embassies etc. every year.

Planning & Economic Development

In developing countries like India the government has been making lot of expenditures for the planned economic development of the country. The government has given lot of importance to the development of infrastructure under different plans. Setup of large and basic industries like iron &steel industry, heavy engineering, machinery, chemical industries and number of small scale industries required lots of expenditures.

Urbanization

Development leads to urbanization and growth of cities and towns. Due to this the expenditures on civil administration like water supply, sanitation, electricity, transport, maintenance of roads, railways, public park, courts have all increased.

Rural Development

In developing countries the govt. has to spend a lot of money on rural development. It has to undertake programs like community development, credit to farmers, marketing and warehousing facilities, irrigation facilities, power supply etc for agricultural development.

Welfare State

Modern states are welfare states. The main objective of the welfare state is to promote economic, political and social well being of its citizens. For this purpose govt. has to conduct number of activities.

Interest Payment

Modern Govt. have been borrowing on large scale internally and externally. The interest on these debts has to be paid. It is very large in developing countries like India. It has increased the unproductive expenses extensively. Interest payment is around 3 to 4 % of India’s GDP.

Subsidies

In developing countries subsidies have become very important recurring non developmental exp. Over the years. Subsidies are on food, fertilisers and petroleum, services like railways, roadways,higher education, medical facilities, power supply and irrigation facilities to farmers etc.

Inflation & Natural Calamities

Rising prices means the govt. has to pay more for all its purchases. Inflation has played crucial role in increasing public Expenditures.

Flood, Drought, Earthquake etc. natural calamities have also increased the burden on governments.