611: Public Finance and

Taxation

Dr. Mohammed Jamal Uddin FCMA

Topic-3: Public Expenditure Policy

MBA, Evening,
Fall 2021
 Contents

 Concept,
 Causes of expenditure, [ch-8]
 Principles of expenditure evaluation,[ch-9]
 Public choice in determining the level of
public expenditure,[]
 Government expenditure patterns
 The case of Bangladesh.[ch-11]
 Public Expenditure

Two main branches of public finance are public revenue and

public expenditure.
• Public expenditure refers to Government expenditure i.e.
Government spending incurred by Central, State and Local
governments of a country.
• The expenditure incurred by public authorities like central, state
and local governments to satisfy the collective social wants of
the people is known as public expenditure.
• In developing countries, public expenditure policy not only
accelerates economic growth & promotes employment
opportunities but also plays a useful role in reducing poverty
and inequalities in income distribution.
 Classification of Public Expenditure

Classification of Public expenditure refers to the systematic arrangement of

different items on which the government incurs expenditure. Classifications
based on different views:

 Functional Classification: various functions like defense, social welfare,

agriculture, infrastructure and industrial development.

 Revenue and Capital Expenditure: Revenue expenditures are current or

consumption expenditures incurred on civil administration, defense forces,
public health and education, maintenance of government machinery. Capital
expenditures are incurred on building durable assets, like highways,
multipurpose dams, irrigation projects, buying machinery and equipment.
 Classification of Public Expenditure…

 Transfer and Non-Transfer Expenditure: Transfer expenditure relates to the

expenditure against which there is no corresponding return, such as Old Age
Pension Schemes, subsidies, interest payments etc. The non-transfer expenditure
relates to expenditure which results in creation of income or output, such as
Economic infrastructure such as power, transport, irrigation, etc.

 Productive and Unproductive Expenditure: Expenditure on infrastructure

development, public enterprises or development of agriculture increase
productive capacity in the economy and bring income to the government.
Expenditures in the nature of consumption such as defense, interest payments,
expenditure on law and order, public administration, do not create any productive
asset which can bring income or returns to the government.
 Classification of Public Expenditure…

 Development and Non-Development Expenditure: All expenditures that

promote economic growth and development are termed as development
expenditure. Unproductive expenditures are termed as non development
expenditures.

 Grants and Purchase Price: Grants are those payments made by a public
authority for which their may not be any quid-pro-quo, i.e., there will be no
receipt of goods or services. For example, old age pension, unemployment
benefits etc. Purchase prices are expenditures for which the government
receives goods and services in return. For example, salaries and wages to
government employees and purchase of consumption and capital goods.

 Classification According to Benefits: Common benefits to all- expenditure on

education, public health etc. Special benefits to all- social security measures,
community welfare etc. Special benefits to some- old age pension, subsidies
to weaker section etc.
 Classification of Public Expenditure…

Hugh Dalton's Classification of Public Expenditure: Expenditures on political

executives: i.e. maintenance of ceremonial heads of state, like the president.
Administrative expenditure: to maintain the general administration of the
country, like government departments and offices. Security expenditure: to
maintain armed forces and the police forces. Expenditure on administration of
justice: include maintenance of courts, judges, public prosecutors.
Developmental expenditures: to promote growth and development of the
economy, like expenditure on infrastructure, irrigation, etc. Social expenditures:
on public health, community welfare, social security, etc. Public debt charges:
include payment of interest and repayment of principle amount.
 Causes of Increase in Public Expenditure

 Size of the Country and Population: developing world has seen an enormous
increase in population growth. Consequently, the expansion in administrative
activities of the government (like defense, police, and judiciary) has resulted
in a growth of public expenditures in these areas.

 Defense Expenditure: The tremendous growth of public expenditure can be

attributed to threats of war. mere sovereignty, demands a larger allocation of
financial sources for defense preparedness.

 Welfare State: Various socio-economic programs are undertaken to promote

people’s welfare. Modern governments spend huge money for the purpose of
economic development. It builds up not only social infrastructure but also
economic infrastructure in the form of transport, electricity, etc.
 Causes of Increase in Public Expenditure…

 Economic Development: Economic development is largely conditioned by the

availability of economic infrastructure. Only by building up economic
infrastructure, road, transport, electricity, etc., the structure of an economy
can be made to improve. Obviously, for financing these activities, government
spends money.

 Price Rise: Increase in government expenditure is often ascribed to

inflationary price rise.
 Principles Governing Public Expenditure
or Canons of Public Expenditure

Rules or principles that govern the expenditure policy of the government

are called canons of public expenditure. Fundamental principles of public
spending determine the efficiency and propriety of the expenditure itself.
While making its spending program, government must follow these
principles.
There are some common canons (principles) of public expenditure:
 Canon of benefit
 Canon of economy
 Canon of sanction
 Canon of surplus
 Principles Governing Public Expenditure
or Canons of Public Expenditure…

 Canon of benefit : Public spending has to be made in such a way that it

confers greatest social benefits.
 Canon of economy: It refers to the avoidance of wasteful and
extravagant expenditure. Public expenditure must be made in such a way
that it becomes productive and efficient. Efficiency in public expenditure
requires economy of expenditures.
 Canon of sanction: Public spending should not be made without any
sanction of an appropriate authority. Arbitrariness in public spending can
be avoided only if spending is approved. Further, economy in public
spending can never be ensured if it is not sanctioned.
 Canon of surplus: The government must prepare its budget in such a
way that government revenue exceeds government expenditure so as to
create a surplus. It must not run deficit to cover its expenditure.
 Importance of Public Expenditure
The modern state is described as the ‘welfare state’. The activities of the
modern government have widened enormously by undertaking various
social and economic activities, particularly in less developed countries
(LDCs).
 Economic Development: Without government support and backing, a
poor country cannot make huge investments to bring about a favorable
change in the economic base of a country. That is why massive
investments are made by the government in the development of basic
and key industries, agriculture, consumable goods, etc. Public
expenditure has the expansionary effect on the growth of national
income, employment opportunities, etc.
 Fiscal Policy Instrument: Public expenditure is considered as an
important tool of fiscal policy. Public expenditure creates and increases
the scope of employment opportunities during depression. Thus, public
expenditure can prevent periodic cyclical fluctuations.
 Importance of Public Expenditure…

 Redistribution of Income: Public expenditure is used as a powerful fiscal

instrument to bring about an equitable distribution of income and
wealth. There are good much public expenditure that benefit poor
income groups. By providing subsidies, free education and health care
facilities to the poor people, government can improve the economic
position of these people.

 Balanced Regional Growth: Public expenditure can correct regional

disparities. By diverting resources in backward regions, government can
bring about all-round development there so as to compete with the
advanced regions of the country.
 Expenditure Evaluation: Principles
There are some principles on which public expenditure is evaluated:
 Decision Rules
 Fundamentals of Project Evaluation
 Types of Benefits and Costs
 Measurement of Benefits of Costs
 Assigning Weights in Project Selection
 Efficiency and Equity Once more
 Discounting and the Cost of Capital
 Risk and Economic Change.
Project evaluation involves determination of the ways in which the most efficient
use can be made of scarce resources. In its simple form, the issue is how to
determine the composition of the budget of a given size or how to allocate a total
of given funds among alternative projects. There is also the more complex
question of determining the appropriate size of the budget. Further
complications arise when projects are not divisible but in lumpy form.
Expenditure Evaluation: Principles
Expenditure Evaluation: Principles
Expenditure Evaluation: Principles
Expenditure Evaluation: Principles