Publ

i
cfi
nance&t
axat
ion

CHAPTERTWO
PUBLI
CREVENUE-
--
-GENERALCONSI
DERATI
ONS
2.Publ
i
cRev
enue
2.
1.Sour
cesofpubl
i
crev
enues
Gov
ernmenthaspl
ayedani
mpor
tantr
olei
nthesoci
oeconomi
cdev
elopmentofsoci
ety
.Soci
al
dev
elopmentmaybei
nthef
orm ofr
aisi
ngt
hel
evelofl
i
vingandsoci
alwel
far
eint
he f
orm of
pr
ovi
ding soci
alameni
ti
est
othepeopl
e.Soci
alameni
ti
esar
eint
hef
orm ofeducat
ion,
heal
th
andsani
tat
ion,
uti
l
iti
esl
i
keel
ect
ri
csuppl
y,wat
ersuppl
yet
c,andr
ecr
eat
ionf
aci
l
iti
es.
Thepr
ocessofsoci
o-economi
cdev
elopmentr
equi
ri
nghugeexpendi
tur
ecannotbe car
ri
ed unl
ess
t
he gov
ernment has t
he per
enni
alsour
ce of i
ncome. Ev
erygov
ernmenthast
woi
mpor
tant
sour
cesofr
evenue.Thesear
e:
a)Taxsour
ces,
and
b)Non-
taxsour
ces.
Whati
saTax?
Taxi
soneoft
hemosti
mpor
tantsour
cesofr
evenuet
oev
erygov
ernment
.Int
heear
li
erday
s,
pay
mentoft
axeswasopt
ional
.Achoi
cewasgi
vent
othepeopl
etopayt
het
axandt
oav
ailt
he
benef
itofsoci
alameni
ti
esi
nthef
orm ofeducat
ion,heal
th and sani
tat
ion, ut
il
it
ies and
r
ecr
eat
ion f
aci
l
iti
es. Nat
ural
l
y, ev
ery
onei
nter
est
edi
nav
ail
i
ngsoci
alameni
ti
esusedt
o
ev
aluat
ethebenef
itder
ivedbyhi
minexchangef
ort
het
axt
obepai
dbyhi
m.Butt
heopt
ioni
nthe
pay
mentoft
axcr
eat
ed l
otofpr
obl
ems f
ort
he gov
ernmenti
nful
fi
ll
i
ng t
hei
robl
i
gat
ions t
o
soci
ety
.Hence,i
n moder
nti
mes,opt
ion was wi
thdr
awn and t
ax became acompul
sor
y
cont
ri
but
ion by ev
ery ci
ti
zen t
o t
he gov
ernment t
o enabl
ethegov
ernmentt
oful
fi
lli
ts
commi
tment
stowar
dssoci
ety
.
Ev
eryGov
ernmenti
mposest
woki
ndsoft
axes:
1.Di
rectt
axes,
and
2.I
ndi
rectt
axes
At
ax,i
nthemoder
nti
mes,t
her
efor
eisacompul
sor
ylev
yand t
hosewho ar
etaxed hav
e
t
o pay t
he sums i
rr
espect
ive of cor
respondi
ng r
etur
n of ser
vices orgoodsbyt
he
gov
ernment
.Iti
snota pr
icepai
d byt
het
ax-
pay
erf
oranydef
ini
teser
vicer
ender
ed ora
commodi
ty suppl
i
ed by t
he gov
ernment
.The t
ax-
pay
ers do getmany benef
it
sfr
om t
he
gov
ernmentbutnot
ax-
pay
erhasar
ightt
oanybenef
itf
rom t
hepubl
i
cexpendi
tur
eont
hegr
ound
t
hathei
spay
ingat
ax.Thebenef
it
sofpubl
i
cexpendi
tur
emaygot
oany
onei
rr
espect
iveoft
he

1
 Publ
i
cfi
nance&t
axat
ion

t
axespai
d.Ther
efor
e,wemaysayt
hatt
axesar
ecompul
sor
ypay
ment
stogov
ernmentwi
thout
expect
ati
onofdi
rectr
etur
norbenef
itt
othet
ax-
pay
er.

2.
2.Obj
ect
ivesofTaxat
ion
I
nit
ial
l
y,gov
ernment
simposet
axesf
ort
hreebasi
cpur
poses:t
ocov
ert
hecostofadmi
nist
rat
ion,
mai
ntai
ningl
aw andor
deri
nthecount
ryandf
ordef
ense.Butnow gov
ernment
’s expendi
tur
e
pat
ter
n changed and gi
vesser
vicet
othepubl
i
cmor
ethan t
heset
hreebasi
cpur
poseand i
t
r
est
ore soci
alj
ust
ice i
nthe soci
ety bypr
ovi
dingsoci
alser
vices suchas publ
i
cheal
th,
empl
oyment
,pensi
on,
housi
ng,
sani
tat
ionandot
herpubl
i
cser
vices.Ther
efor
e,gov
ernment
sneed
muchamountofr
evenuet
hanbef
ore.Togener
atemor
erev
enueagov
ernmenti
mposest
axeson
v
ari
oust
ypes.I
ngener
alobj
ect
iveoft
axat
ionsar
e:
1.Rai
singr
evenue:t
orenderv
ari
ouseconomi
candsoci
alact
ivi
ti
es,
agov
ernmentneedsl
arge
amountofr
evenueandt
omeett
hisgov
ernmenti
mposesv
ari
oust
ypesoft
axes.
2.Remov
al ofi
nequal
i
ties i
nincome and weal
th: gov
ernment adopt
spr
ogr
essi
vet
ax
sy
stem and st
ressed on canon ofequal
i
tyt
oremov
einequal
i
tiesi
nincomeandweal
th
oft
hepeopl
e.
3.Ensur
ing economi
c st
abi
l
ity
:taxat
ion af
fect
sthe gener
al l
evel ofconsumpt
ionand
pr
oduct
ion.Hence,i
tcanbeusedasef
fect
ivet
ool f
orachi
evi
ng economi
c st
abi
l
ity
.
Gov
ernment
s use t
axat
ion t
o cont
rol
inf
lat
ionanddef
lat
ion
4.Reduct
ion i
nregi
onali
mbal
ances:I
fther
eisr
egi
onali
mbal
ance wi
thi
nthe count
ry,
gov
ernment
s can use t
axat
ion t
oremov
e such i
mbal
ance byt
axexempt
ions and t
ax
concessi
onst
oinv
est
orswhomadei
nvest
menti
nunderdev
elopedr
egi
ons.
5.Capi
talaccumul
ati
on:Taxconcessi
onort
axr
ebat
esgi
venf
orsav
ingsori
nvest
menti
n
pr
ovi
dentf
unds,l
i
fei
nsur
ance,i
nvest
ment i
n shar
es and debent
ures l
ead t
olar
ge
amount of capi
talaccumul
ati
on,whi
ch i
s essent
ialf
or t
he pr
omot
ion ofi
ndust
ri
al
dev
elopment
.
6.Cr
eat
ionofempl
oymentoppor
tuni
ti
esGov
ernment
smi
ghtmi
nimi
zeunempl
oymenti
nthe
count
rybygi
vi
ngt
axconcessi
onorexempt
ionst
osmal
lent
repr
eneur
sandl
abori
ntensi
ve
i
ndust
ri
es.
7.Pr
event
inghar
mfulconsumpt
ionsGov
ernmentcan r
educehar
mfult
hingson t
hesoci
ety
byl
evy
ing heav
yexci
se t
ax on ci
gar
ett
es,al
cohol
s and ot
herpr
oduct
s,whi
ch wor
sen
peopl
e’
sheal
th.

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 Publ
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axat
ion

8.Benef
ici
aldi
ver
sionofr
esour
cesGov
ernment
simpose heav
ytax on non-essent
ialand
l
uxur
ygoodst
odi
scour
age pr
oducer
sofsuch goodsand gi
vet
ax r
ater
educt
ion or
exempt
iononmostessent
ialgoods. Thi
sdi
ver
tspr
oduce’
sat
tent
ionandenabl
est
he
count
ryut
il
izet
out
il
izet
hel
i
mit
edr
esour
cesf
orpr
oduct
ionofessent
ial
goodsonl
y.
9. Encour
agementofexpor
tsGov
ernment
s enhance f
orei
gn exchange r
equi
rement
t
hrough expor
t-or
ient
ed st
rat
egy
.These pr
ovi
de a cer
tai
ntax exempt
ion f
or t
hose
expor
ter
s and encour
age t
hem wi
th ar
rangi
ng a f
ree t
rade zones and bymaki
nga
bi
l
ater
alandmul
ti
lat
eral
agr
eement
.
10.Enhancementofst
andar
dofl
i
vingThegov
ernmental
soi
ncr
easest
hel
i
vingst
andar
dof
peopl
ebygi
vi
ngt
axconcessi
onst
ocer
tai
nessent
ial
goods
2.
3.Char
act
eri
sti
csofaGoodTaxSy
stem
(
1)Taxi
saCompul
sor
yCont
ri
but
ion
At
axi
sacompul
sor
ypay
mentf
rom t
heper
sont
otheGov
ernmentwi
thoutexpect
ati
onof
anydi
rectr
etur
n.Ev
eryper
sonhast
opaydi
rectaswel
lasi
ndi
rectt
axes.Asi
tisacompul
sor
y
cont
ri
but
ion,noonecanr
efuset
opayat
axont
hegr
ound t
hathe orshe does notgetany
benef
itf
rom cer
tai
npubl
i
cser
vicest
hegov
ernmentpr
ovi
des.
(
2)TheAssessewi
l
lber
equi
redt
opayTaxi
fisduef
rom hi
m:No one can be f
orced by any
aut
hor
it
yto payt
ax,i
fiti
s notdue f
rom hi
m.Suppose,i
fther
eisat
axonl
i
quor
,thest
atecan
f
orceani
ndi
vi
dualt
opayt
het
axonl
ywhenhedr
inksl
i
quor
.But
,ifhedoesnotdr
inkl
i
quor
,hecannot
bef
orcedt
opayt
het
axon l
i
quor
.Si
mil
arl
y,i
fan i
ndi
vi
dual
’
sincome i
s bel
ow t
heexempt
ion
l
i
mit
,hecannotbef
orced t
o payt
axoni
ncome.Forexampl
eindi
vi
dual
sear
ningmont
hlysal
ary
bel
owbi
rr150cannotbef
orcedt
opayt
axoni
ncome.
(
3)Taxesar
elev
iedbyt
heGov
ernment
Noonehast
her
ightt
oimposet
axes.Onl
ythegov
ernmenthast
her
ightt
oimposet
axesandt
o
col
l
ectt
axpr
oceedsf
rom t
hepeopl
e.
(
4)CommonBenef
it
stoAl
l
Thet
ax,
socol
l
ect
edbyt
heGov
ernment
,isspentf
ort
hecommonbenef
itofal
lthepeopl
e.I
not
her
wor
ds,
whent
hegov
ernmentcol
l
ect
sat
ax,
itspr
oceedsar
espentt
oext
endcommonbenef
it
stoal
l
t
hepeopl
e. The Gov
ernment i
ncur
sexpendi
tur
e on t
he def
ense of t
he count
ry, on
mai
ntenance ofl
aw and or
der
,pr
ovi
sionofsoci
alser
vicessuchaseducat
ion,heal
thet
c.Such
benef
it
sar
egi
vent
o al
lthe peopl
e-whet
hert
hey ar
etax-
pay
ers ornon-
taxpay
ers.These
benef
it
ssat
isf
ysoci
alwant
s.Butt
heGov
ernmental
sospendsonsubsi
diest
osat
isf
ymer
itwant
s

3
 Publ
i
cfi
nance&t
axat
ion

ofpoorpeopl
e.
(
5)NoDi
rectBenef
it
I
nthemoder
nti
mes,
ther
eisnodi
rectr
elat
ionshi
pbet
weent
hepay
mentoft
axanddi
rectbenef
it
s.I
n
ot
herwor
ds,t
her
eisabsenceofanybenef
itf
ort
axespai
dtot
heGov
ernment
alaut
hor
it
ies.The
gov
ernmentcompul
sor
il
ycol
l
ect
sal
lty
pesoft
axesand doesnotgi
veanydi
rectbenef
itt
otax-
pay
ersf
ort
axespai
d.Forexampl
e,whent
axabl
eincomei
sear
nedbyani
ndi
vi
dual
oracor
por
ati
on,
heori
tsi
mpl
ypay
sthe t
ax amountatt
he speci
fi
ed r
ate cannotdemand anybenef
itagai
nst
suchpay
ment
(
6)Cer
tai
nTaxesLev
iedf
orSpeci
fi
cObj
ect
ives
Though t
axes ar
eimposed f
orcol
l
ect
ing r
evenue f
ort
he gov
ernmentt
o meetexpendi
tur
e
onsoci
alwant
sandmer
itwant
s,cer
tai
ntaxesar
eimposedt
oachi
evespeci
fi
c obj
ect
ives.For
exampl
e,heav
ytaxes ar
eimposed on l
uxur
ygoods t
oreduce t
hei
rconsumpt
ion so t
hat
r
esour
ces ar
e di
rect
ed t
othe pr
oduct
ion ofessent
ialgoods,such as cheaperv
ari
ety of
cl
oth,l
esscost
lygoodsofmassconsumpt
ion,et
c.Thus,t
axesar
elev
iednotonl
ytoear
n
r
evenue but al
so f
ordi
ver
sionofr
esour
cesorsav
ingf
orei
gnexchange.Cer
tai
ntaxesar
e
i
mposedt
oreducei
nequal
i
tiesofi
ncomeandweal
th.
(
7)At
ti
tudeoft
heTax-
Pay
ers
Theat
ti
tudeoft
het
ax-
pay
ersi
sani
mpor
tantv
ari
abl
edet
ermi
ningt
hecont
ent
sofagoodt
axsy
stem.
I
tmay be assumed t
hateach t
ax-
pay
erwoul
dli
ke t
o beexempt
edf
rom t
axpay
ing,whi
l
ehe
woul
dnotmi
ndi
fot
herbear
sthatbur
den.I
nanycase,hewoul
d wanthi
sshar
eto bewi
thi
nthe
gener
all
eveloft
ax bur
denbei
ngbor
nebyot
her
s.I
not
herwor
ds,i
tisessent
ialt
hatagoodt
ax
sy
stem shoul
dappearequi
tabl
etot
het
ax-
pay
ers.Si
mil
arl
y,ov
eral
lbur
denoft
het
axsy
stem i
sof
equali
mpor
tance.Theat
ti
tudesoft
het
ax-
pay
ersi
nthi
sregar
dar
einf
luencedbyahostofot
her
f
act
orsl
i
ket
hepol
i
ticalsi
tuat
ionsuchaswarorpeace,nat
uralcal
ami
ti
es l
i
ke f
loods and
dr
ought
s,economi
c si
tuat
ions l
i
ke pr
osper
it
yordepr
essi
onandsoon.
(
8)Goodt
axsy
stem shoul
dbei
nhar
monywi
thnat
ional
obj
ect
ives
Agoodt
axsy
stem shoul
druni
nhar
monywi
thi
mpor
tantnat
ionalobj
ect
ivesandi
f possi
ble shoul
d
assi
st t
he soci
ety i
n achi
evi
ng t
hem. I
t shoul
d t
ry t
oaccommodat
ethe at
ti
tudeand
pr
obl
emsoft
ax-
pay
ersandshoul
dal
sot
akei
ntoconsi
der
ati
ont
hegoal
sofsoci
alandeconomi
c
j
ust
ice.I
tshoul
dal
soy
iel
dadequat
erev
enuef
ort
het
reasur
yandshoul
dbef
lexi
bleenought
omov
e
wi
tht
hechangi
ngr
equi
rement
soft
heSt
ateandt
heeconomy
.
(
9)Tax-
syst
em r
ecogni
zesbasi
cri
ght
soft
ax-
pay
ers
4
 Publ
i
cfi
nance&t
axat
ion

Agoodt
axsy
stem r
ecogni
zest
hebasi
cri
ght
soft
het
ax-
pay
ers.Thet
ax-
pay
eri
sexpect
edt
opayhi
s
t
axesbutnotunder
gohar
assment
.Inot
herwor
ds,t
het
axl
awshoul
d be si
mpl
einl
anguage and
t
het
axl
i
abi
l
ityshoul
dbedet
ermi
nedwi
thcer
tai
nty
.Themodeandt
imi
ngsofpay
mentshoul
d
be conv
eni
entt
othe t
ax-pay
er.Att
hesamet
ime,at
axsy
stem shoul
dbeequi
tabl
ebet
weent
ax-
pay
ers.I
tshoul
dbepr
ogr
essi
veandbur
denoft
axat
ionshoul
dbeequi
tabl
eonal
lthet
ax-pay
ers.

2.
4.Rev
enueRecei
pts
Theser
ecei
ptsar
edi
vi
dedi
ntot
ax-
rev
enueandnon-
taxr
evenue.Tax
-rev
enuei
s
di
vi
dedi
ntot
hreesect
ions:
TAXREVENUE
a) Taxesoni
ncomeandexpendi
tur
e
Thi
ssect
ioncov
erscor
por
ati
ont
ax,
incomet
ax,expendi
tur
etaxandsi
mil
arot
hert
axes,
ifany
b) Taxesonpr
oper
tyandcapi
tal
transact
ions
Thi
ssect
ioncov
erst
axesonspeci
fi
cfor
msofweal
thandi
tst
ransf
erssuchasest
atedut
y,weal
tht
ax,
gi
ftt
ax,
houset
ax,
landr
evenueandst
ampsandr
egi
str
ati
onf
ees,
etc.
c) Taxesoncommodi
ti
esandser
vices
Thi
s sect
ion i
ncl
udes t
axes on pr
oduct
ion, sal
e, pur
chase, t
ranspor
t,st
orage,and
consumpt
ionofgoodsandser
vices.Non-t
axr
evenueoft
hegov
ernmenti
sdi
vi
dedi
ntot
hree
sect
ions
(
a)Cur
rency
, coi
nage and mi
nt: Thi
s cat
egor
y cov
ers t
he r
ecei
pts ofCur
rencyNot
e
Pr
essandoft
heMi
nts.Pr
ofi
tfr
om ci
rcul
ati
onofsmal
lcoi
nsi
sal
soi
ncl
udedher
e.
(
b)I
nter
estr
ecei
pts,di
vi
dendsandpr
ofi
ts:Thi
ssect
ioncompr
ises,apar
tfr
om i
nter
estr
ecei
pts on
l
oans by t
he gov
ernment t
o ot
her par
ti
es, di
vi
dendsand pr
ofi
ts f
rom publ
i
c sect
or
under
taki
ngs r
un by or as gov
ernmentdepar
tment
s i
ncl
udi
ng ot
her i
ncome gener
ati
ng
depar
tment
s.Ex
ampl
esar
econt
ri
but
ionsf
rom r
ail
way
sandpost
sandt
elecommuni
cat
ions,and
sur
pluspr
ofi
tsoft
heReser
veBankt
ransf
err
edt
otheGov
ernment
.
(
c)Ot
her non–t
ax r
evenue:Thi
s sect
ion cov
ersr
evenue f
rom v
ari
ousgov
ernmentact
ivi
ti
es
and ser
vicessuch asf
rom admi
nist
rat
iveser
vices,publ
i
cser
vicecommi
ssi
on,pol
i
ce,j
ail
s,

5
 Publ
i
cfi
nance&t
axat
ion

agr
icul
tur
alandal
l
iedser
vices,i
ndust
ryand mi
ner
als,wat
erand powerdev
elopmentser
vices,
t
ranspor
tand communi
cat
ions, suppl
i
es and di
sposal
, publ
i
c wor
ks, educat
ion,housi
ng,
i
nfor
mat
ion and publ
i
cit
y,br
oadcast
ing,gr
ant
s-i
n-ai
d andcont
ri
but
ionset
c.
Thef
oll
owi
ngcat
egor
iesofr
evenuear
eincl
udedunderot
hernon-
taxr
evenue.
Admi
nist
rat
iveRev
enue:
Iti
ncl
udest
hef
oll
owi
ng:
(
1)Fees:I
tist
hecompul
sor
ypay
mentmadebyt
hei
ndi
vi
dual
swhoobt
ainadef
ini
teser
vicei
nret
urn.
Feesar
echar
gedbyt
heGov
ernmentt
obeart
hecostofadmi
nist
rat
iveser
vicesr
ender
edbyi
t.These
ser
vicesar
erender
edf
ort
hebenef
itofgener
alpubl
i
c.I
tincl
udescour
tfee,
regi
str
ati
onf
ee,
etc.
(
2)Li
censes:Al
i
censef
eei
scol
l
ect
ednotf
oranyser
vicer
ender
ed,butf
orgi
vi
ngper
missi
onora
pr
ivi
l
eget
othosewhowantt
odoaspeci
alorspeci
fi
edwor
k.I
tischar
gedont
hegr
oundsofcont
rol
ofcer
tai
nact
ivi
ti
es.

(
3)Fi
nesandPenal
ti
es:Fi
nesandpenal
ti
esar
eimposedasaf
orm ofpuni
shmentf
ort
hemi
stakes
commi
tt
edsuchasv
iol
ati
onoft
hepr
ovi
sionsofl
aw,
etc.Thebasi
cai
m behi
ndt
hem i
stopr
eventt
he
peopl
efr
om maki
ngmi
stakes.Af
inei
sal
socompul
sor
yli
keat
ax,buti
tisi
mposedmor
easa
det
erentt
hanasasour
ceofr
evenue.
(
4)For
fei
tur
es:For
fei
tur
emeanst
hepenal
tyi
mposedbyt
hecour
tsont
heper
sonswhohav
enot
compl
i
edwi
tht
henot
iceser
vedbyi
torf
ort
hebr
eachofcont
ractorhasf
ail
edt
opayt
heduesi
nti
me,
et
c.
(
5)Escheat
s:Thepr
oper
tyofaper
sonhav
ingnol
egalhei
rsanddy
ingi
ntest
ate,wi
l
lbet
aken
possessi
onofbyt
heGov
ernment
.Thati
s,t
heGov
ernmentcant
akeov
ert
hepr
oper
tyofaper
son
whodi
eswi
thouthav
inganyl
egalhei
rsorwi
thoutkeepi
ngawi
l
l.But
,itcannotbeconsi
der
edasa
mai
nsour
ceofr
evenuet
otheGov
ernment
.
(
6)Speci
alAssessment
:Accor
dingt
oPr
of.Sel
i
gman,speci
alassessmentmeans“
acompul
sor
y
cont
ri
but
ionl
evi
edi
npr
opor
ti
ont
othespeci
albenef
itder
ivedt
odef
rayt
hecostoft
hespeci
fi
c
i
mpr
ovementt
opr
oper
tyunder
takeni
nthepubl
i
cint
erest
”.Thus,i
tisacompul
sor
ypay
mentor
cont
ri
but
ion.I
tisl
evi
ed
i
npr
opor
ti
ont
othespeci
albenef
it
sder
ivedt
obeart
hecostofspeci
fi
cimpr
ovementt
opr
oper
ty.
Whenev
ert
he Gov
ernmenthas made cer
tai
nimpr
ovement
s,somebodywi
l
lgetbenef
it
ed.For
exampl
e,i
rr
igat
ionf
aci
l
ity
,

6
 Publ
i
cfi
nance&t
axat
ion

r
oadanddr
ainagef
aci
l
ity
,et
c.
Becauseoft
his,t
hev
alueoft
hepr
oper
tyi
nthenei
ghbor
hoodwi
l
lri
se.Thi
sri
sei
nthev
aluewi
l
l
pr
ovi
deanunear
nedi
ncr
ement
.Hence,t
heGov
ernmenthasar
ightt
oappr
opr
iat
eapar
toft
his
unear
nedi
ncr
ease.Thi
sappr
opr
iat
ioni
scal
l
edasspeci
alassessment
.
(
7)Gi
ft
s and Gr
ant
s:Gi
ft
s ar
evol
unt
ary cont
ri
but
ions f
rom Non-
Gov
ernmentdonor
stot
he
Gov
ernmentf
orv
ari
ouspur
posesl
i
kedr
oughtr
eli
ef,def
ense,nat
ionalr
eli
ef,pr
omot
ionoff
ami
l
y
pl
anni
ng,
etc.Gr
ant
sar
eusual
l
ygi
venbyoneGov
ernmentt
oanot
her
.Forexampl
e,i
naf
eder
alsetup,
t
heUni
onGov
ernmentpr
ovi
desgr
ant
stot
heSt
ateGov
ernment
stocar
ryoutt
hei
rfunct
ionsand
f
ulf
il
lmentofobl
i
gat
ions.Mor
eov
er,t
heGov
ernmentofonecount
rymayr
ecei
vegr
ant
sfr
om ot
her
count
ry
2.
5Capi
tal
Recei
pts
Capi
talr
ecei
ptsoft
hegov
ernmentt
akemoneyf
orms.Themosti
mpor
tantonecompr
isesoff
resh
bor
rowi
ngswhi
chcanbecl
assi
fi
edi
nter
msoft
hei
ror
igi
nandmat
uri
tyet
c.Forexampl
e,ont
hebasi
s
ofor
igi
n,publ
i
cbor
rowi
ngsmaybeext
ernal(
out
sidet
hecount
ry)
,ori
nter
nal(
wit
hint
hecount
ry)
.I
n
t
ermsofmat
uri
ty,
ther
emaybenon-
ter
minabl
e(orper
pet
uit
ies)
,”
longt
erm”
,“medi
um t
erm”
,or“
shor
t
t
erm”l
oanswi
thspeci
fi
cdemar
cat
ionofboundar
iesf
oreach.Theymaybemar
ket
abl
eornon-
mar
ket
abl
e,i
nter
est-
fr
eeori
nter
estbear
ing,et
c.Thenextcat
egor
yofr
ecei
ptscov
ersr
ecov
eryof
l
oansduef
rom debt
orst
othegov
ernment
. Some capi
tal r
ecei
pts maybe i
n t
he f
orm of
gr
ant
s anddonat
ions,
deposi
tsandappr
opr
iat
ionst
ovar
iousf
undsandsoon.
2.
6Thebase,
buoy
ancyandEl
ast
ici
tyofat
ax
2.
6.1 Thebaseoft
ax
Thebaseofat
axi
sthel
egaldescr
ipt
ionoft
heobj
ectwi
thr
efer
encet
owhi
cht
het
axappl
i
es.
Ev
eryt
ax has a base.For exampl
e,t
he base of i
ncome-
tax i
sthemoney i
ncome of
assesses;t
hebaseofanexer
cisedut
yist
hev
olumeofpr
oduct
ionorpacki
ngorpr
ocessi
ng
ofaspeci
fi
cgood-
wit
hint
heent
erpr
ise,
thebaseofcust
omsdut
yist
hev
alueofi
mpor
torexpor
t
ofgoods.Thebaseofeacht
axhast
obedef
inedl
egal
l
yfort
hepur
poseofdet
ermi
ningt
het
ax
l
i
abi
l
ityofani
ndi
vi
dualt
ax-
pay
er.Eacht
axpay
eri
sconsi
der
edal
egalent
it
yfort
hispur
pose.
Accor
dingl
y,an i
ndi
vi
duall
egalent
it
ymaybe subj
ect
ed t
o mor
ethan one t
ax.Ev
eryt
ax
base mayhav
eat
ime-
dimensi
on al
so.Fori
nst
ance,i
ncome-
taxi
susual
l
yonannualbasi
s.
Wi
tht
hepassageoft
ime,at
axbaseunderconsi
der
ati
onmaygr
ow ormayshr
ink.Thi
swi
l
l
dependont
hev
olume,t
ransact
ionort
hepol
i
cyoft
hegov
ernment
.Forexampl
e as pr
oduct
ion
ofexci
sabl
e goods i
ncr
eases,t
he base ofexci
se dut
ieswoul
dbet
ermedt
ohav
egr
own.I
f

7
 Publ
i
cfi
nance&t
axat
ion

new i
temsar
ebr
oughtwi
thi
nthepur
view ofexci
set
axat
ion,weshal
lsayt
hatt
hecov
erageof
exci
se t
axat
ion hav
e ext
ended and t
he base ofexci
se t
axat
ion has been wi
dened,i
fthe
pr
oduct
ionofnewi
temscov
eredunderexci
sedut
iesi
ncr
eases.
2.
6.2 Buoy
ancyofaTax
Buoy
ancyofat
axi
ndi
cat
est
hef
act
orsr
esponsi
blef
orani
ncr
easei
nthey
iel
dofat
ax-
overt
ime.I
fa
t
axr
evenuei
ncr
easewi
tht
hegr
owt
hofi
tsbase,butwi
thoutanupwar
drev
isi
onoft
het
axr
ates
(
wit
houtani
ncr
easei
nther
ateoft
ax)
,thent
het
axi
ssai
dtobebuoy
ant
.Ithasani
nher
entt
endency
t
oyi
eldmor
etaxr
evenuewi
tht
hegr
owt
hoft
hebase.Forexampl
e,i
f10% i
ncr
easei
nsal
est
ax
col
l
ect
ioni
sowi
ngt
o10%i
ncr
easei
fthev
olumeofsal
esandnotduet
oani
ncr
easei
ntaxr
ates,
iti
s
t
ermedast
hemeasur
eofbuoy
ancyi
.e.10%buoy
ancy
.
Si
mil
arl
y,i
fyi
eldf
rom i
ncome-
taxi
ncr
eases as nat
ionali
ncome i
ncr
eases wi
thgi
venr
ates
ofi
ncome-
tax,
itwoul
dbet
ermedabuoy
antt
ax.Anot
herexampl
eist
hatofexci
sedut
ies.Exci
se
dut
iesar
eimposedonpr
oduct
ionofspeci
fi
edgoods.I
fnewi
temsar
enotbr
oughtundert
hese
dut
ies andt
he r
atesofexi
sti
ngdut
iesr
emai
nunchanged,butt
her
evenuef
rom exci
sedut
ies
i
ncr
easeswi
thani
ncr
easei
nthepr
oduct
ionofexci
sabl
eit
ems,wehav
eacaseofbuoy
ancyof
exci
sedut
ies.

2.
6.3 El
ast
ici
tyofaTax
El
ast
ici
tyt
axi
srel
atedt
other
ateoft
axandy
iel
dofat
ax.I
fthey
iel
dofat
axi
ncr
easesordecr
eases
owi
ng t
oreduct
ion ori
ncr
ease i
ntax r
ates,we cal
litel
ast
ici
tyofat
ax.They
iel
dofat
axmay
al
sogouponaccountofext
ensi
onofi
tscov
erageorar
evi
sionofi
tsr
ates.Suchachar
act
eri
sti
cofa
t
axi
sref
err
edt
oasi
tsel
ast
ici
ty.I
not
herwor
ds,t
heel
ast
ici
tyofat
axr
efer
stot
hest
epst
aken
byaut
hor
it
iesi
nincr
easi
ngi
tsy
iel
dthr
oughanext
ensi
onofi
tscov
erageorr
evi
sionofi
tsr
ates.
2.
7Pr
inci
plesoft
axat
ion
At
axsy
stem (
thati
s,t
hesetofal
ltaxes)f
orachi
evi
ngcer
tai
nobj
ect
iveschoosesandadher
est
o
cer
tai
npr
inci
pleswhi
char
eter
medi
tschar
act
eri
sti
cs.Agoodt
axsy
stem t
her
efor
e,i
soneof
whi
chdesi
gnedont
hebasi
sofanappr
opr
iat
esetofpr
inci
ples,suchasequal
i
tyandcer
tai
nty
.
Most
ly,howev
er,obj
ect
ivesoft
axat
ionconf
li
ct wi
th each ot
her and a compr
omi
se i
s
needed .
ther
efor
e,usual
l
yeconomi
stssel
ectsomei
mpor
tantobj
ect
ivesand wor
koutt
he

8
 Publ
i
cfi
nance&t
axat
ion

cor
respondi
ngpr
inci
pleswhi
cht
het
axsy
stem shoul
dadher
eto.Thef
ir
stsetofsuchpr
inci
ples
wasenunci
atedbyAdam smi
th(
whi
chhecal
l
edCannonsofTaxat
ion)
CanonsofTaxat
ion
Thef
ourcanonsoft
axat
ionaspr
escr
ibedbyAdam Smi
thar
ethef
oll
owi
ng:
(
1)CanonofEqual
i
ty:Thi
s canon pr
ocl
aims t
hata good t
ax i
sthatwhi
ch i
s based on t
he
pr
inci
ple ofequal
i
ty.I
n ot
herwor
ds subj
ect
s ofev
ery st
ate oughtt
ocont
ri
but
etowar
dst
he
suppor
toft
hegov
ernment
,asnear
lyaspossi
ble,i
npr
opor
ti
onoft
hei
rrespect
iveabi
l
iti
es,t
hati
s,i
n
pr
opor
ti
ont
other
eser
vewhi
cht
heyr
espect
ivel
yenj
oyundert
hepr
otect
ionoft
heSt
ate.I
timpl
i
es
whatt
hei
ncomewhi
chaper
sonenj
oysundert
hepr
otect
ionoft
heSt
ate,
shoul
d be t
axed on t
he
pr
opor
ti
onalr
ate of t
axat
ion. But moder
neconomi
stsdo notagr
eewi
th Adam Smi
th.They
adv
ocat
epr
ogr
essi
vet
axat
iont
oobser
vet
he canonofequal
i
ty.I
not
herwor
ds,t
heyadv
ocat
e
pr
ogr
essi
onshoul
dbet
hebasi
sfori
mposi
ngt
axes.
(
2)CanonofCer
tai
nty
Thi
scanoni
smeantt
opr
otectt
het
axpay
ersf
rom unnecessar
yhar
assmentbyt
he‘
taxof
fi
cial
s’
.
I
timpl
i
est
hatt
het
ax-
pay
ershoul
dbewel
linf
ormedaboutt
he t
ime,amountand t
he met
hod
of t
ax pay
ment
.Accor
ding t
oAdam Smi
th,“
thet
ax,whi
cheachi
ndi
vi
duali
sboundt
opay
,
oughtt
obecer
tai
nandnotar
bit
rar
y.Thet
imeofpay
ment
,themannerofpay
ment
,thequant
it
yto
bepai
d,oughtal
ltobecl
earandpl
aint
othecont
ri
but
orandt
oev
ery ot
her per
son.
” Adam
Smi
th was al
so of t
he v
iew t
hat t
hegov
ernmentmustal
so becer
tai
n oft
heamount
whi
ch i
t der
ives f
rom apar
ti
cul
art
ax.Thust
hiscanoni
sequal
l
yimpor
tantbot
hfort
he
i
ndi
vi
dual
andt
hest
ate.

(
3)CanonofConv
eni
ence
Thet
hir
dcanonofAdam Smi
thi
sthatofconv
eni
ence.Accor
dingt
oAdam Smi
th,
“ev
eryt
axought
t
obesol
evi
edatt
het
imeori
nthemanneri
nwhi
chi
tismostl
i
kel
ytobeconv
eni
entf
ort
he
cont
ri
but
ort
opayi
t.
”Inot
herwor
ds,t
axes shoul
d be i
mposed i
n such a mannerand att
he
t
imewhi
ch i
s mostconv
eni
entf
ort
he t
ax-
pay
er,i
.e.
,the bestt
ime f
ort
hecol
l
ect
ionofl
and
r
evenuei
sthet
imeofhar
vest
.Si
mil
arl
y,t
axesonr
entofhousesshoul
dbecol
l
ect
edwheni
tismost
conv
eni
entf
ort
hecont
ri
but
ort
opay
.
(
4)CanonofEconomy
Thef
our
thcanoni
sthecanonofeconomy
.Thi
s canon i
mpl
i
es t
hatt
headmi
nist
rat
ive cost
of t
ax col
l
ect
ion shoul
d be mi
nimum, i
.e.
,thedi
ff
erencebet
weent
hemoney
,whi
ch

9
 Publ
i
cfi
nance&t
axat
ion

comesoutoft
hepocket
sofpeopl
eandt
hatwhi
chi
sdeposi
tedi
nthepubl
i
ctr
easur
y,shoul
dbe
assmal
laspossi
ble.Admi
nist
rat
ive cost of t
ax col
l
ect
ion shoul
d be mi
nimum because
l
evy
ingof a t
ax mayr
equi
re a gr
eat numberof of
fi
cer
s,whosesal
ari
esmayeatupt
he
gr
eat
erpar
toft
hepr
oduceoft
het
ax,andwhosepr
e-r
equi
sit
esmayi
mposeanot
heraddi
ti
onal
t
axupont
hepeopl
e.Hence,
theadmi
nist
rat
ivecostshoul
dbemi
nimum.I
naddi
ti
ont
otheabov
e
f
ourcanonsgi
venbyAdam smi
th,t
hef
oll
owi
ngot
hercanonshav
ebeenadv
ancedbyBasabl
e
andot
hereconomi
sts.
(
5)CanonofPr
oduct
ivi
ty
Thecanonofpr
oduct
ivi
tyadv
ocat
edbyBast
abl
eimpl
i
est
hatt
axesshoul
dbepr
oduct
ive.The
pr
oduct
ivi
tyofat
axmaybeobser
vedi
ntwoway
s.I
nthe f
ir
st pl
ace, a t
ax shoul
d y
iel
d a
sat
isf
act
ory amount f
or t
hemai
ntenanceofagov
ernment
.Inot
herwor
ds,
thet
axshoul
dbesuch
t
hati
tpr
ocur
es a consi
der
abl
e amountof r
evenue f
ort
he expendi
tur
e of t
hegov
ernment
,
Secondl
y,t
he t
axes shoul
d notobst
ructand di
scour
agepr
oduct
ioni
ntheshor
taswel
lasi
nthe
l
ongr
un.
(
6)CanonofEl
ast
ici
ty
Bast
abl
e al
so l
aid st
ress on t
he pr
inci
ple ofel
ast
ici
ty.The canon ofel
ast
ici
tyi
mpl
i
es t
hat
y
iel
dsoft
axesshoul
dbei
ncr
easedordecr
easedaccor
dingt
otheneedsoft
hegov
ernment
.
The gov
ernmentmayneedf
undst
ofacenat
uralcal
ami
ti
esandot
herunf
oreseencont
ingenci
es.
I
tmayneedf
undst
ofi
nanceawarorf
ordev
elopmentpur
poses.Thegov
ernmentr
esour
cescanbe
r
aisedqui
ckl
yonl
ywhent
hesy
stem i
sel
ast
ic.
(
7)CanonofDi
ver
sit
y
Thecanonofdi
ver
sit
yputf
orwar
dbyBast
abl
eimpl
i
est
hatt
het
axsy
stem shoul
dbedi
ver
sei
n
nat
ure.I
not
herwor
ds,
inat
axsy
stem,
ther
eshoul
dbeal
lty
pesoft
axesso t
hatev
ery
onemay
be cal
l
ed upon t
o cont
ri
but
esomet
hing t
owar
ds t
he r
evenues of t
he st
ate.Thus,t
he
gov
ernment
sshoul
dadoptmul
ti
plet
axsy
stem.
(
8)CanonofSi
mpl
i
cit
y
Thecanonofsi
mpl
i
cit
yimpl
i
est
hatat
axshoul
deasi
l
ybeunder
stoodbyt
het
ax-
pay
er,i
.e.
,it
s
nat
urei
tsai
ms,
time,
ofpay
ment
,met
hodandbasi
sofest
imat
ionshoul
dbeeasi
l
yfol
l
owedbyeach
t
ax-
pay
er.I
not
herwor
ds,
thet
axi
mposedont
het
ax-
pay
ersshoul
dbesosi
mpl
ethatt
heyar
eabl
e
t
oguess easi
l
ythe ai
m of i
tsi
mposi
ti
on and t
hey ar
e not conf
ront
ed wi
thaccount
ing,
admi
nist
rat
iveoranyot
herdi
ff
icul
ti
es.
(
9)CanonofExpedi
ency

10
 Publ
i
cfi
nance&t
axat
ion

Thi
scanoni
mpl
i
est
hatt
hepossi
bil
i
tiesofi
mposi
ngat
axshoul
dbet
akeni
ntoaccountf
rom
di
ff
erentangl
es,i
.e.i
tsr
eact
ionupont
he t
ax-pay
ers.Somet
imesi
tisseent
hatt
axmaybe
desi
rabl
eandmaybepr
oduct
iveandmayhav
emostoft
hechar
act
eri
sti
csofagoodt
ax,y
et
t
he gov
ernmentmay not f
ind i
t expedi
ent t
o i
mpose i
t,f
or exampl
e, pr
ogr
essi
ve
agr
icul
tur
ali
ncomet
ax,buti
thasnotbeeni
mposed.Sof
ari
nthemanneri
tshoul
dhav
ebeen
i
mposed.
3. Char
act
eri
sti
csofagoodt
axsy
stem andappr
oachest
otaxat
ion

Publ
i
cexpendi
tur
eiscont
inuousl
yincr
easi
ngwi
tht
hei
ncr
easei
nthef
unct
ionsofmoder
n
gov
ernment
s. I
tisnow ani
mpor
tantpr
obl
em ofev
erygov
ernmentt
osecur
eadequat
e
amountofpubl
i
crev
enuet
ofi
nancei
tsexpendi
tur
e.Tempor
aryr
evenue may be obt
ained
by bor
rowi
ng,butev
ent
ual
l
yloans mustbe r
epai
d.Some r
evenues ar
e secur
ed f
rom
gov
ernmentent
erpr
ises,admi
nist
rat
ive andj
udi
cialact
ivi
ti
es,and f
rom ot
hersour
ces,
butt
he gr
eatbul
k orr
evenue comesf
rom t
axat
ion.Ofal
lthese sour
ces ofear
ning
r
evenue,i
tist
he t
ax sy
stem t
hati
sthe mostcompl
i
cat
edanddi
ff
icul
ttounder
stand.
Foracount
ryt
ocol
l
ectmor
erev
enue,
thet
axsy
stem admi
nist
rat
ionshoul
dbeef
fi
cient
.
I
n t
his chapt
er, we wi
l
l di
scuss about t
he concept of t
ax st
ruct
ure and
admi
nist
rat
ion,t
he char
act
eri
sti
cs of a good t
ax sy
stem,and al
so t
he di
ff
erent
appr
oachest
otaxat
ion.
4.PUBLI
CEXPENDI
TURE
4.
1Meani
ngandI
mpor
tanceofPubl
i
cExpendi
tur
e
Publ
i
c expendi
tur
eisi
ncur
red by publ
i
c aut
hor
it
ies -
-Cent
ral
,St
ate and l
ocalGov
ernment
s
ei
therf
ort
hesat
isf
act
ionofcol
l
ect
iveneedsoft
heci
ti
zensorf
orpr
omot
ingt
hei
reconomi
cand
soci
alwel
far
e.Publ
i
cexpendi
tur
eisnotonl
ythemosti
mpor
tantbutal
sot
hecent
ralpar
toft
he
st
udyofpubl
i
cfi
nance.I
tisi
ncur
redbyt
hegov
ernmentf
ort
heat
tai
nmentofpubl
i
cgood.Ev
ery
gov
ernmenthast
omai
ntai
nlaw andor
der
,ar
medf
orcesf
orpr
ovi
dingpr
otect
ion,publ
i
cpar
ks,
school
s,heal
thoft
hepeopl
e.Gov
ernmenthast
oper
for
m cer
tai
not
herwel
far
emeasur
esl
i
ke
mat
erni
typr
otect
ion,ar
rangi
ngf
orcheap f
ood,cl
oth and l
ow-
costhousi
ng f
ort
he poorand
so on.Al
lthesemul
ti
far
iousact
ivi
ti
eswhi
ch ar
eincr
easi
ng ev
eryy
earr
equi
rehuge f
unds.
Ther
efor
e publ
i
c expendi
tur
e,deal
s wi
tht
he expendi
tur
e whi
ch a gov
ernmenti
ncurf
ori
ts
ownmai
ntenance,t
hesoci
etyandt
heeconomyandhel
pingot
hercount
ri
es.
4.
2Cur
rentandCapi
tal
Expendi
tur
e

11
 Publ
i
cfi
nance&t
axat
ion

Techni
cal
ly
,int
he st
ruct
ure ofa budget
,mostgov
ernment
s cl
assi
fy publ
i
cexpendi
tur
eint
o
t
wo:
i
. Cur
rentexpendi
tur
e,and
i
i
. Capi
tal
expendi
tur
e
Al
lsor
tsofadmi
nist
rat
iveanddef
enseexpendi
tur
eanddebtser
vicesar
ecal
l
edcur
rentexpendi
tur
e.Theyar
e
al
sor
efer
redt
oasnon-
dev
elopment
alexpendi
tur
e.Theyar
eint
ended f
orcont
inui
ng t
he exi
sti
ng f
low of
goods and ser
vices andmai
ntai
ning t
he capi
tal oft
he count
ry i
ntact
.On t
he ot
her hand,capi
tal
expendi
tur
es cont
ri
but
etoi
ncr
eased pr
oduct
ivecapaci
tyof t
he nat
ion andt
her
efor
e,ar
e known as
dev
elopmentexpendi
tur
e.Expendi
tur
esonconst
ruct
ionofdams,publ
i
cwor
ks,st
ateent
erpr
ises,agr
icul
tur
al
andi
ndust
ri
aldev
elopmentet
c.,
arei
nst
ancesofcapi
tal
expendi
tur
e.

Thoughpubl
i
cexpendi
tur
eisameansofmai
ntai
ningt
hecapi
taloft
he count
ryi
ntact
,iti
s not
mer
elya f
inanci
almechani
sm,i
tisr
athera means ofsecur
ingsoci
alobj
ect
ives.Soci
ali
sm
canber
eal
i
zedonl
ythr
oughpr
ogr
essi
vet
axat
ionandt
hei
rdi
str
ibut
ionaf
ter
war
ds. Ther
efor
e,
publ
i
c expendi
tur
eist
hatexpendi
tur
eincur
red byt
he publ
i
c aut
hor
it
ies i
.e.Cent
ral
,St
ate
andLocalGov
ernment
s,t
osat
isf
ythosecommonwant
swhi
cht
hepeopl
eint
hei
rindi
vi
dual
capaci
tyar
eunabl
etosat
isf
yef
fi
ciencywant
s.
4.
3Obj
ect
iv
esofPubl
i
cExpendi
tur
e
Dr
.Dal
tondi
vi
dedt
heai
msofpubl
i
cexpendi
tur
eint
otwopar
ts:

i
.Secur
it
y of l
i
fe agai
nst t
he ext
ernal aggr
essi
on and i
nter
naldi
sor
der
andi
njust
ice.
i
i
.Dev
elopmentorupgr
adat
ionofsoci
all
i
fei
nthecommuni
ty.

 Fi
rst
ly,The publ
i
c aut
hor
it
ywor
ks i
n manyway
sfort
he benef
itoft
he peopl
e.The
gov
ernmentor
gani
zest
hegener
ali
zedser
vicesl
i
kepubl
i
cheal
thandeducat
ion.Thewhol
e
soci
etyi
sbenef
it
edbyt
hesef
unct
ionsoft
hest
ate.
 Secondl
y,t
hroughpubl
i
cexpendi
tur
e,t
hegov
ernmenti
nfl
uencesdi
rect
lyori
ndi
rect
ly,t
he
i
ndust
ri
alandcommer
cialsy
stem oft
henat
iont
her
ebyhel
pst
owar
dst
heeconomi
cand
soci
aldev
elopmentoft
hesoci
ety
.
 Thi
rdl
y,i
nmoder
nti
mes,t
her
esponsi
bil
iti
esoft
hegov
ernmentar
eincr
easi
ngev
ery
y
ear
.Fort
heeconomi
cdev
elopmentoft
hecount
ry,
thegov
ernmenthasst
art
ed,
oni
tsown
accor
d,i
ndust
ri
es and commer
cialbusi
ness.Thi
ssect
oroft
heeconomywhi
chi
sunder
12
 Publ
i
cfi
nance&t
axat
ion

t
hedi
rectcont
rolofst
atehascomet
obeknownaspubl
i
csect
or.Expendi
tur
eont
his
sect
ori
sincr
easi
ngr
api
dlyev
eryy
ear
.
 Four
thl
y,Dal
tonpoi
ntsoutt
hatt
hepubl
i
cexpendi
tur
eshoul
dbecar
ri
edon up t
othat
l
i
mitwher
ethe mar
ginalbenef
it
s ar
isi
ng f
rom di
ff
erentbr
anchesofexpendi
tur
ear
e
equal
.Thesemar
ginalbenef
it
smustbeequalt
othemar
ginalsacr
if
icei
ncur
redbyt
he
publ
i
c.Publ
i
cspendi
ngshoul
dbedesi
gnedt
oopt
imi
zet
hel
evelofi
nvest
menti
nsucha
wayast
omai
ntai
nful
lempl
oyment
--
wit
hgr
owt
h.Publ
i
cspendi
ngmaybei
ncur
redatan
i
ncr
easi
ngr
atei
nthebackwar
dregi
ont
oupl
i
ftt
hei
reconomy
.

4.
4Reasonsf
orGr
owi
ngExpendi
tur
e

Amul
ti
tudeoff
act
orshav
ecausedt
her
isi
ngt
rendofpubl
i
cexpendi
tur
einmoder
nti
mes.The
f
oll
owi
ngsar
efewoft
hem:
1.Wel
far
eSt
ate:Themoder
nst
atei
sawel
far
est
ate.I
tai
msatpr
omot
ingt
heeconomi
c,pol
i
tical
andsoci
alwel
lbei
ngofci
ti
zens.I
thast
ospendi
ncr
easi
ng amount
s on such i
tems as soci
al
i
nsur
ance,
unempl
oymentr
eli
ef,f
reemedi
calai
d,f
reeeducat
ion,chi
l
dwel
far
e,womenwel
far
e,
l
aborwel
far
e,concessi
onalr
atesofwat
ersuppl
y,f
oodst
uff
,el
ect
ri
cit
yet
c.,t
o i
mpr
ove t
he
economi
c and soci
alwel
far
e oft
he count
ry.Asar
esul
t,t
hepubl
i
cexpendi
tur
eisboundt
o
i
ncr
ease.
2.Def
ense:Due t
othe i
nvent
ion of nucl
ear weapons t
her
eis al
way
s adangeroff
orei
gn
aggr
essi
on.I
nter
nat
ionalpol
i
ticalsi
tuat
ioni
suncer
tai
nandi
nse
cur
e.As such,ev
ery nat
ion has
t
o pr
epar
eit
sel
ffora st
rongdef
ense.The def
ense expendi
tur
eint
he f
orm ofexpendi
tur
e
onwarmat
eri
als,mai
ntenance and gr
owt
h ofar
med f
orces,pensi
on t
oret
ir
edwarper
sonnel
et
c.ar
e,ar
eper
pet
ual
l
yri
sing.
3.Popul
ati
on Gr
owt
h:I
tis an admi
tt
ed f
actt
hatt
he popul
ati
on i
sincr
easi
ng r
api
dly
.Asa
r
esul
t,t
hegov
ernmenthast
oincurgr
eat
erexpendi
tur
etomeett
her
equi
rement
soft
hei
ncr
easi
ng
popul
ati
on.
4.Tr
anspor
tandCommuni
cat
ion:Wi
tht
heexpansi
onoft
radeandcommer
ce,t
hest
atehas
t
o pr
ovi
deand mai
ntai
n aqui
ckand ef
fi
cientt
ranspor
tsy
stem.Tr
anspor
tbei
ngapubl
i
cut
il
it
y,
t
hest
atehast
opr
ovi
dei
tcheapl
yal
so.Thegov
ernmenthast
ospendal
otonconst
ruct
ingnew
r
ail
wayl
i
nes,goodr
oads,new r
oads,hi
ghway
s,br
idgesandev
encanal
sto connect di
ff
erent
ar
eas wi
th a smoot
htr
anspor
tsy
stem as apr
econdi
ti
onofgr
owt
h.
13
 Publ
i
cfi
nance&t
axat
ion

5.Ur
bani
zat
ionEf
fect
:Thespr
eadofur
bani
zat
ioni
sani
mpor
tantf
act
orl
eadi
ngt
orel
ati
vegr
owt
h
of publ
i
c expendi
tur
ein moder
nti
mes.Ur
bani
zat
ion i
sresponsi
blef
or t
he i
ncr
ease i
n
expendi
tur
e onwat
ersuppl
y,el
ect
ri
cit
y,const
ruct
ion and mai
ntenance ofhospi
tal
s,school
s
andot
herpubl
i
cser
vices.
6.Gr
owt
h ofDemocr
acy:Gr
owt
h ofdemocr
acyand soci
ali
sm has been r
esponsi
blef
ort
he
i
ncr
easi
ngt
endencyofpubl
i
cexpendi
tur
etoagr
eatext
ent
.Inademocr
acy
,toachi
evet
hegoodwi
l
l
oft
hepubl
i
c,t
her
uli
ngpar
tyhast
oincurheavyexpendi
tur
eonpr
ovi
dingv
ari
etyofser
vicesand
f
aci
l
iti
est
othepubl
i
c. Expendi
tur
eonel
ect
ionsandbyel
ect
ionsi
sincr
easi
ng ev
ery y
ear
.
Numberofmi
ni
st
ri
esa
nd execut
ive of
fi
ces hasal
sobeeni
ncr
eased.Asar
esul
toft
hist
hepubl
i
c
expendi
tur
eincr
easesr
api
dly
.
7.Ri
singTr
endofPr
ices:
Publ
i
cexpendi
tur
eisal
soi
ncr
easi
ngi
nev
erycount
ryduet
ori
singt
rendof
pr
ices.Ther
easoni
sthatt
hegov
ernmenthas t
o buygoods and ser
vices f
rom t
he mar
ketat
hi
gher pr
ices. Thegov
ernmenthasal
sot
oincr
easet
hesal
ari
es,dear
nessal
l
owanceet
c.,of
gov
ernmentempl
oyees l
eadi
ng t
oar
api
dincr
ease i
n gov
ernmentexpendi
tur
e.
8.I
ncr
easei
ntheAct
ivi
ti
esoft
heSt
ate:I
nrecenty
ear
s,act
ivi
ti
esoft
hest
ate,par
ti
cul
arl
yint
he
soci
alandeconomi
cfi
elds,suchaseducat
ion,publ
i
cheal
th,publ
i
crecr
eat
ion,publ
i
cwor
ks,
commer
ceandi
ndust
ry,
fiv
eyearpl
ans,
etc.hav
eincr
easedt
remendousl
y.
9.The pl
anni
ng ef
fect
s:I
nal
ess dev
eloped economy
,the gov
ernmentadopt
s economi
c
pl
anni
ng f
or t
he dev
elopment of t
he count
ry.I
napl
annedeconomy
,thus,whent
hepubl
i
c
sect
ori
sexpandi
ngi
tsr
ole,
thepubl
i
cexpendi
tur
eshowsani
ncr
easi
ngt
rend.Hugesumsar
eal
so
spentbyt
hegov
ernmentonf
ormul
ati
ngandi
mpl
ement
ingpl
ans.
TheRur
10. alDevel
opmentEf
fect
:Inanunder
dev
elopedcount
ry,
thegov
ernmenthasal
sot
ospend
mor
eandmor
eforr
uraldev
elopment
.Ithast
ounder
takeschemesl
i
kecommuni
tydev
elopment
pr
oject
sandsoci
almeasur
es.Thegov
ernmental
soi
ncur
sexpendi
tur
eoni
mpar
ti
ngt
rai
ningt
o
per
sonnel
fori
mpl
ement
ingr
ural
dev
elopmentpr
ogr
ams.
11.
Gener
alExpendi
tur
e and I
nter
nalSecur
it
y:I
nter
nalsi
tuat
ion ofacount
ryi
s becomi
ng
uncer
tai
n and i
nsecur
e day by day
.Gov
ernmenthasbeenconst
ant
lyf
aci
ng communaland
pol
i
ticalr
iot
s.Hence,
to checkandcont
rolt
hese t
roubl
es,t
he gov
ernment has t
o spend
mor
e on t
hemai
ntenanceofl
awandor
der
.Mor
eov
er,t
hegov
ernmenti
sboundt
ospendhuge
amount
s,asi
naf
reecount
ryi
tisessent
ial
thatt
hej
ustdemandsoft
hepubl
i
car
edul
yconsi
der
ed.

4.
5CanonsofPubl
i
cEx
pendi
tur
e

14
 Publ
i
cfi
nance&t
axat
ion

Theexpr
essi
on “
canonsofpubl
i
cexpendi
tur
e”i
tused f
ort
hef
undament
alr
ulesor pr
inci
ples
gov
erni
ngt
hespendi
ngpol
i
cyoft
hegov
ernment.
thef
oll
owi
ngcanonsofpubl
i
cexpendi
tur
ehav
e
beenl
aiddownPr
of.Fi
ndl
eyShi
rr
as:
a)CanonofBenef
it
:Thi
scannonsuggestt
hatev
erypubl
i
cspendi
ngmustul
ti
mat
elybeusedf
ort
he
causeofsoci
albenef
iti
.e.f
ort
hegener
alwel
l
-bei
ngo
fth
eco
mmo
npe
opl
e.I
n ot
herwor
ds,t
he
st
atespendi
ngshoul
dconf
erbenef
it
sont
heent
ir
ecommuni
tyatl
arget
hatonani
ndi
vi
dual
gr
ouporsect
ion.I
tmeanspubl
i
cfundsshoul
dbespenti
nsuchdi
rect
ionswhi
chpur
suecommon
i
nter
estandpr
omot
egener
alwel
far
e.
b)Canon ofEconomy:i
timpl
i
es t
hatpubl
i
c expendi
tur
e shoul
d be i
ncur
red car
eful
l
y and
economi
cal
l
y.Economyher
emeanst
hatwast
efulandext
rav
agantexpendi
tur
eshoul
dbeav
oided
atal
ll
evel
s.Publ
i
cexpendi
tur
emustbepr
oduct
iveandef
fi
cient
.Hence,
itmustbei
ncur
redonl
yon
ev
eryessent
iali
temsofcommonbenef
it
-wi
thoutdupl
i
cat
ioni
nawayt
hati
nvol
vesmi
nimum
cost
.Anef
fi
cientsy
stem off
inanci
aladmi
nist
rat
ioni
sther
efor
e,v
eryessent
ial
inanycount
ry.
c)Canonofsanct
ion:Thesecannonsuggestt
hatnopubl
i
cspendi
ngshoul
dbemadewi
thoutt
he
appr
ovalofpr
operaut
hor
it
y.Onl
yobt
aini
ngpr
iorsanct
ioni
snotsuf
fi
cient
.Itmustbe pr
oper
ly
i
nspect
ed and exami
nedwhet
hert
he sanct
ioned amountofmoneyi
s bei
ng spentpr
oper
ly
onsanct
ionedi
temsornot
.Asar
ule,t
her
efor
e,moneymustbespentont
hepur
posef
orwhi
chi
t
i
ssanct
ionedbyt
hehi
ghestaut
hor
it
yandaccount
spr
oper
lyaudi
ted.
d)CanonofSur
pl
us:t
hiscannonsuggest
sthatsav
ingi
sav
irt
ueev
enf
ort
hegov
ernment
,soan
i
dealbudgeti
sonewhi
chcont
ainsanel
ementofsur
plus bykeepi
ng publ
i
c expendi
tur
e bel
ow
publ
i
crev
enue.I
not
herwor
ds,
publ
i
caut
hor
it
iesshoul
dai
m atsur
plusofi
ncomeov
erexpendi
tur
e
and t
heyshoul
d av
oid def
ici
ts.Fr
equentand huge def
ici
tsl
ead t
ouncont
rol
l
abl
efi
nanci
al
si
tuat
ionwi
thdi
reconsequencesofi
nfl
ati
on.Ther
efor
e,ev
erygov
ernmentshoul
dat
temptt
o
bal
ancei
tsi
ncomeandexpendi
tur
e.
e)CanonofEl
ast
ici
ty:t
hiscanonr
equi
rest
hatt
heexpendi
tur
epol
i
cyoft
hest
ate shoul
d be such
t
hatchanges mustbe possi
blei
nthe expensesaccor
ding t
othe change i
nrequi
rement
s
and ci
rcumst
ances. I
not
herwor
ds,t
her
eshoul
dbescopef
orchar
gesi
npubl
i
cexpendi
tur
e
accor
dingt
other
equi
rement
soft
hecount
ry.
) Ca
f non of Pr
oduct
ivi
ty:Thi
s canon or pr
inci
plei
mpl
i
es t
hat t
heexpendi
tur
e pol
i
cy of
t
he Gov
ernment
s shoul
d be such t
hat woul
dencour
agepr
oduct
ioni
n a count
ry.That
meansal
argepar
tofpubl
i
cexpendi
tur
emustbeal
l
ocat
edf
ordev
elopmentpur
pose.
g)CanonofEqui
ty:Oneoft
hef
oremostai
msofpubl
i
cexpendi
tur
eisal
sot
oensur
ethej
ustand

15
 Publ
i
cfi
nance&t
axat
ion

equi
tabl
edi
str
ibut
ionofi
smor
esi
gni
fi
cantf
ort
hecount
ri
eswher
ethegapbet
weent
hehi
ghest
i
ncomeandt
hel
owesti
ncomegr
oupsi
sver
ywi
de.Under
dev
elopedcount
ri
esl
i
keI
ndi
a,hav
e
gi
ven t
his ai
m a si
gni
fi
cantand par
ti
cul
ari
mpor
tance i
nthe economi
cact
ivi
ti
esoft
heSt
ate
andi
nthei
rfi
scal
pol
i
cies.
4.
6Ef
fect
sofPubl
i
cexpendi
tur
e
Publ
i
c expendi
tur
e,i
n moder
n gov
ernmentf
inance,i
sregar
ded as a means ofsecur
ing
soci
alends r
ather t
han j
ust bei
ng a mer
efi
nanci
almechani
sm. Publ
i
cexpendi
tur
eis
si
gni
fi
canti
namoder
neconomybecausei
tpr
oducesmanydi
rectandi
ndi
rectsoci
o-economi
c
ef
fect
s.Abr
iefaccountoft
heseef
fect
smaybegi
venasunder
:

I
. Ef
fect
sofpubl
i
cexpendi
tur
eonpr
oduct
ion

 Ef
fect
suponabi
l
ityt
owor
k,saveandi
nvest

Abi
l
ityt
owor
k,sav
eandi
nvestdependsupont
heheal
thandef
fi
ciencypossessedbyt
heper
sons.
Heal
thandef
fi
ciencydependsupont
hel
evelofconsumpt
ion and l
evel of consumpt
ion
depends upon t
he publ
i
cexpendi
tur
eincur
redbyt
hegov
ernment
.Publ
i
cexpendi
tur
eon
educat
ion,medi
cal ser
vices, cheap housi
ng f
aci
l
iti
es, means of t
ranspor
t and
communi
cat
ionet
c,wi
l
lincr
easet
heef
fi
ciencyofper
sonst
owor
k.Someoft
heexpendi
tur
e,l
i
ke
t
heexpendi
tur
eonf
reeeducat
ion,unempl
oymentbenef
itand f
ree medi
calf
aci
l
iti
es et
c.,ar
e
hel
pfuli
nincr
easi
ng t
hepur
chasi
ngpoweroft
hepeopl
eespeci
all
yoft
hel
ow i
ncomegr
oups
andhencei
thel
pst
opr
otectandpr
omot
etheef
fi
ciencyoft
hepeopl
eandt
hei
rabi
l
ityt
owor
kand
sav
e.Publ
i
cexpendi
tur
eoni
ncr
easi
ngt
hesal
ari
esandwagesoft
hepeopl
eandt
hesuppl
yof
goodsandar
ti
clesatcheapr
atest
othem wi
l
lincr
easet
hei
rpur
chasi
ngpower
,st
andar
dofl
i
ving,
heal
th,ef
fi
ciencyand hence t
hei
rabi
l
ityt
o wor
k and sav
e mayi
ncr
ease.Li
kewi
se,publ
i
c
expendi
tur
eont
hemai
ntenanceofl
aw andor
der
,cr
eat
esconf
idence i
nthe mi
nds of t
he
peopl
e and hence i
t encour
ages t
hem t
omakei
nvest
menti
npr
oduct
iveact
ivi
ti
es.As
pr
oduct
ioni
ncr
eases,i
ncomeoft
hepeopl
eal
soi
ncr
eases;hencet
hei
rabi
l
ityt
owor
k,sav
eand
i
nvestal
sogoesup.Thusi
tisev
identt
hatpubl
i
cexpendi
tur
ecanpr
omot
eabi
l
ityt
owor
k,sav
e
andi
nvestandt
huspr
omot
epr
oduct
ionandempl
oyment
.
 Ef
fect
suponwi
l
li
ngnesst
owor
k,saveandi
nvest
Publ
i
cexpendi
tur
eal
soaf
fect
sthewi
l
li
ngnessoft
hepeopl
etowor
k,sav
eandi
nvest
.Pensi
on,
16
 Publ
i
cfi
nance&t
axat
ion

pr
ovi
dent f
und,i
nter
est l
oan,f
ree medi
calandunempl
oyment al
l
owances and ot
her
gov
ernment pay
ment
s pr
ovi
desecur
it
ytoaper
sonand,t
her
efor
e,r
educest
hewi
l
li
ngnessof
per
sonst
owor
k and sav
e,when a per
son knows t
hat wi
l
l be l
ooked af
ter by t
he
gov
ernmentwhen hei
snoti
n a posi
ti
on t
o ear
n anyi
ncome.I
ntheabsenceofanysav
ing,
t
hequest
ionofi
nvest
mentdoesnotar
iseatal
l
.On t
he cont
rar
y, expect
ati
on of l
arger
ameni
ti
es and hi
gher st
andar
d ofl
i
ving woul
d st
imul
ate peopl
eto wor
k har
d.I
tist
his
encour
agementwhi
ch woul
d encour
aget
hem t
o sav
emor
eand t
oinv
estt
hei
rsav
ingsf
or
pr
oduct
ionpur
poses.Expendi
tur
eonbenef
it
ssuchassi
cknessbenef
it
swoul
dcer
tai
nlyi
ncr
ease
t
hedesi
reoft
hepeopl
etowor
kmor
e,si
ncet
heyar
eassur
edofr
eli
efi
ftheyf
allsi
ckduet
ohar
d
wor
k.
 Ef
fect
sondi
ver
sionofr
esour
ces
Publ
i
cexpendi
tur
eal
soaf
fect
sthedi
ver
sionofr
esour
ces.Gov
ernmenti
ncur
spubl
i
cexpendi
tur
e
i
nthe f
orm ofgi
vi
ng f
inanci
alassi
stance t
opr
oduct
ive sect
or.I
nthe same way
,ift
he
gov
ernmentwi
shes t
o at
tractpr
oduct
iver
esour
ces t
o a par
ti
cul
arar
ea orr
egi
on,i
twi
l
l
st
artgi
vi
ngv
ari
etyofi
ncent
ivesi
nthef
orm oft
axhol
i
day
sandot
heral
l
owancesorconcessi
ons
et
c.t
othei
ndust
ri
ali
sts.

I
I. Ef
fect
sofpubl
i
cexpendi
tur
eondi
str
ibut
ion

Publ
i
c expendi
tur
e al
so hel
ps t
he gov
ernment i
n br
ingi
ng about equi
tabl
edi
str
ibut
ion on
i
ncome and weal
th.Not onl
ytaxat
ion pol
i
cy but publ
i
cexpendi
tur
epol
i
cycanal
sor
emov
e
i
nequal
i
tiesi
nthedi
str
ibut
ionofi
ncomeandweal
th. To br
ing about equi
tabl
e di
str
ibut
ion of
i
ncome and weal
th,t
hegov
ernmentshoul
dimposehi
ghert
axesont
her
ichersect
ionofsoci
ety
andt
heamountr
eal
i
zedf
rom t
hem shoul
dthenbespentont
hepoor
ersect
ionofsoci
etybywayof
pr
ovi
dingsoci
alameni
ti
es,
andsubsi
diest
othem.Publ
i
cexpendi
tur
ehas,
thus,
ani
mpor
tantr
olei
n
r
educi
ngeconomi
cinequal
i
tiesi
nthesoci
ety
.

I
II
. Ef
fect
sofpubl
i
cexpendi
tur
eonempl
oyment

Publ
i
cexpendi
tur
eaf
fect
sempl
oymentaswel
lasempl
oymentoppor
tuni
ti
es. I
tcani
ncr
ease
empl
oymenti
nthecount
ry.Ther
efor
e,t
hepubl
i
cexpendi
tur
epol
i
cyoft
hegov
ernmentshoul
dbeso
dev
isedast
ocr
eat
eaddi
ti
onal
jobsbot
hint
hepubl
i
candpr
ivat
esect
ors.

17
 Publ
i
cfi
nance&t
axat
ion

Thef
oll
owi
ngexpendi
tur
esoft
hegov
ernmenti
ncr
easeempl
oymentoppor
tuni
ti
es.
(
i)Heavyexpendi
tur
eint
hepubl
i
csect
or
Fort
he economi
c dev
elopmentoft
he count
ry,t
he gov
ernmentshoul
dmakei
nvest
menti
n
publ
i
csect
orsuchasheavyengi
neer
ing,i
ronandst
eelcoal et
c. Pr
oduct
iongoodssect
or
pr
ovi
desdi
rectempl
oymentt
othepeopl
e by cr
eat
ing mi
l
li
ons ofj
obs. Thus i
t cl
ear
ly
becomes t
her
esponsi
bil
i
tyoft
hest
atet
opr
eventasi
tuat
ionofunempl
oyment
.

(
ii
)Expendi
tur
eonpubl
i
cut
il
it
ies

Publ
i
cexpendi
tur
eincur
redbyt
hegov
ernmentonpubl
i
cut
il
it
ies,
suchassuppl
yofwat
er,
elect
ri
cit
y,
t
elephoneser
vices,
etc.
,cr
eat
eal
argev
olumeofempl
oyment
.

(
ii
i)
Publ
i
cexpendi
tur
etoencour
agesmal
l
-scal
eindust
ri
es

Topr
omot
eempl
oymenti
nsmal
l
-scal
eindust
ri
es,t
hegov
ernmentshoul
dpr
ovi
det
axi
ncent
ives
andal
l
owancest
osuchi
ndust
ri
es.Thegov
ernmentshoul
dincurpubl
i
cexpendi
tur
eonsmal
l
-scal
e
sect
ori
nthe f
orm ofcheap cr
edi
t,suppl
y ofr
aw mat
eri
als atconcessi
onalr
ates,f
ree
t
echnol
ogi
calassi
stance,
hel
pingt
hesei
ndust
ri
esi
nthemar
ket
ingofgoodset
c.I
nthi
sway
,lar
ge
empl
oymenti
scr
eat
edi
nthesmal
l
-scal
esect
or.
(
iv)Publ
i
cexpendi
tur
edur
ingt
heper
iodofdepr
essi
on

Publ
i
c expendi
tur
e pl
ays an i
mpor
tant r
ole dur
ing t
he per
iods ofdepr
essi
onand
r
ecessi
on.Depr
essi
on i
s a per
iod off
all
i
ng pr
ices,f
all
i
ng demand due t
ofal
l
ing i
ncomes.
Recessi
oni
saper
iodof r
isi
ng pr
ices,f
all
i
ngdemandandr
isi
ngcostofpr
oduct
ion.I
tist
he
r
esponsi
bil
i
tyoft
hegov
ernmentt
ocheckt
hesesi
tuat
ionsbyi
ncur
ri
ngpubl
i
c expendi
tur
eon
publ
i
c wor
ks,pr
ogr
ams and pr
oducer
s by way of pr
ovi
ding t
axi
ncent
ivesandr
educi
ng
t
he r
ates ofsal
es t
ax,dut
ies,cust
om dut
ies et
c.Suchexpendi
tur
ecr
eat
esempl
oymentand
i
ncomei
nthecount
ryandconsequent
ly,
eff
ect
ivedemandst
art
sri
sing.

(
v)Publ
i
cexpendi
tur
etocr
eat
eempl
oymenti
nbackwar
dar
eas

Tocr
eat
eempl
oymentoppor
tuni
ti
esi
nbackwar
dregi
ons,t
hegov
ernmentshoul
d pr
omot
e
18
 Publ
i
cfi
nance&t
axat
ion

i
ndust
ri
esi
nthe publ
i
csect
orand pr
ivat
e sect
ori
nbackwar
dar
eas.Toencour
agei
ndust
ri
es
i
nthepubl
i
caswel
laspr
ivat
esect
ors,t
hegov
ernmentshoul
dgr
antdeduct
ionsandconcessi
ons
t
osuchi
ndust
ri
es.I
fpubl
i
cexpendi
tur
eisdi
rect
ed t
owar
dst
hepr
omot
ion ofi
ndust
ri
esi
nthe
publ
i
candpr
ivat
esect
orsi
nbackwar
dar
eas,notonl
ywi
l
laddi
ti
onalj
obsbecr
eat
ed,butt
he
mar
ket
swi
l
lbeal
sowi
denedandt
her
ewi
l
lbeal
lroundeconomi
cdev
elopmentoft
hecount
ry.

I
V. Ef
fect
sofpubl
i
cexpendi
tur
eoneconomi
cst
abi
l
ity
Economi
cst
abi
l
ityi
sjudgedbyt
hebehav
iorofpr
ices.Pr
icest
abi
l
ityi
srel
atedt
othemanneri
n
whi
chpr
icebehav
esi
naneconomy
.Ther
eshoul
dbeanor
malr
isei
n pr
ice because nor
mali
s
consi
der
ed asasi
gnofaheal
thyeconomypr
obl
em ar
iseswhenev
ert
her
ear
epr
icef
luct
uat
ions.
Pr
icef
luct
uat
ionsmaybeknownasabnor
mal
economi
csi
tuat
ions.
Ther
emaybet
hreest
ateofabnor
mal
pri
cebehav
ior
:
(
i)I
nfl
ati
on,
(
ii
)Def
lat
ionordepr
essi
on,
a nd
(
ii
i)Recessi
on.
(
i)Effect
sofpubl
i
cexpendi
tur
einI
nfl
ati
on
I
nfl
ati
on i
s a st
ate of r
isi
ng money suppl
y,r
isi
ng demand but st
abl
esuppl
y.Publ
i
c
expendi
tur
emaybeusef
uli
ncont
rol
l
ingi
nfl
ati
on.I
nthi
ssi
tuat
iont
heai
m oft
hegov
ernment
shoul
dbet
ospendt
hani
tsr
evenue.I
nfl
ati
onmaybeav
ert
edbyr
educi
ngpubl
i
cexpendi
tur
eon
ci
vi
lser
vices,def
ense,i
nter
estpay
ment
set
c.Thef
undsacqui
redbymeansofasur
plusbudget
maybeusedt
opr
ovi
decapi
talt
othosesect
orswhi
chexper
ienceshor
tage ofcapi
talso t
hat
t
he t
otalpr
oduct
ive capaci
ty of t
he economymayi
ncr
ease.Ther
efor
e,publ
i
cexpendi
tur
e
shoul
dbei
ncur
redonmi
nori
rr
igat
ion pr
oject
s,bet
terqual
i
ty ofseeds,manur
e,et
c.,i
nthe
f
iel
d ofagr
icul
tur
e.I
nthef
iel
dofi
ndust
ri
es,publ
i
cexpendi
tur
emaybei
ncur
redonpr
ovi
ding
f
aci
l
iti
esf
ort
heest
abl
i
shmentofnewi
ndust
ri
esandf
ort
heexpansi
onoft
heexi
sti
ngones.