Public Expenditure

Public expenditure refers to the expenses of the public authorities—Central Government, State Government and Local Government—either in protecting the citizens or in promoting the economic social welfare.

Public expenditure, broadly speaking, includes expenditure incurred by a government under the following heads:

• Defence expenditure: It includes expenses on equipment, payment as wages for army personnel, etc. Defence expenditure corresponds to the ‘first duty of sovereign’, viz., defending the society from the violence of other independent societies.
• Civil expenditure or administrative expenditure: It is incurred for the maintenance of law and Justice, viz., securing internal justice between citizens.
• Economic expenditure, (i. e., government expenditure for economic ends): It includes provision of direct services to private enterprises in the form of subsidies and provision of benefits through its own industries.
• Social expenditure: It includes expenditure on education, public health, social Insurance scheme, etc. Each one of the above broad headings includes many subsidiary functions.

Government expenditure can be divided into two heads:

1. Revenue expenditure and,
2. Capital expenditure.

Revenue expenditure

Revenue expenditure of a government is in the form of consumption expenditure. It does not directly create any capital asset for the economy.

• Example: LPG cylinders are made available to domestic consumers at a price which is less than theper unit cost of production of a cylinder. The difference is borne by the government and is known as subsidy. Expenditure on subsidies is a part of the government expenditure it does not lead to creation of any effect.

The other characteristic of revenue expenditure is that it does not cause any reduction in the liability of the government.

• Example: Expenditure incurred on the defence forces of a country does not cause any reduction in the liability of the government.

The major items on which a government increase revenue expenditure include:

a) subsidies,

b) interest on government loans,

c) public administration,

d) defence, and

e) other economic and social services.

Capital expenditure

Capital expenditure is in the form of investment expenditure. It results in creation of assets in the economy. The more the capital expenditure, the larger the quantity of assets that are created.

• Examples: Construction of roads, dams bridges, flyovers, hospitals, schools, canals, etc., involves government expenditure this expenditure creates more assets. The other characteristic of capital expenditure is that it causes a reduction in the liabilities of the government.
• Example: If the government incurs expenditure towards repayment of loans, its liabilities get reduced.

Main Heads of Public Expenditure

Main heads under which expenditure is incurred in India by the Central Government are as follows:

1. Central scheme: Ours is a planned economy. For this purpose, five-year plans are formulated. Within each plan, development programmes are formulated and implemented as a part of each five-year plan. On each of development programmes and schemes government expenditure is included. A provision for this expenditure is made each year in the budget for the year.
2. Central assistance to States: In our federal set-up, the State Governments receive financial assistance for the central government. The financial assistant is granted both for plan and non-plan expenditure of the states. This is extended both on Revenue account and Capital account.
3. Interest payment: It has not been possible for the government to meet its rising expenditure from its own financial resources. it has been resorting to use borrowing both domestically and externally. Any loan, by definition, carries the application to pay interest. Same is the situation of the Government of India. With rising public debt the burden of interest payment has been rising in the economy.
4. Defence: Defence expenditure constitutes a big share of total expenditure on the economy. Defence expenditure is included both on maintenance of armed forces, as also on creation of Defence assets. The former constitutes revenue expenditure, whereas the latter constitute capital expenditure.
5. Public Administration and services: The government is responsible for provision of various social, economic and administrative services in the economy. To run these services, a comprehensive government machinery has been built up at all levels. Huge sums of money are required to be spent on the maintenance and running of this machinery.

Recent Change: 2017 onwards

This 12th five-year plan came to an end on March 31st 2017. With this the era of five-year plans which began with the first five year plan on April 1, 1951, has ended. The planning commission has been disbanded. in view of this distinction between plan expenditure and non plan expenditure has lost its relevance. Hence, with budget 2017-18 onwards, this distinction has been removed from the budget papers.

 

Two other changes in budget provisions may be noted as follows:

 

1.Till the year 2016-17, the railway budget was presented to Parliament separately. From 2017-18 the Railway budget has been merged in the union budget, and it is presented as part of the union budget.

 

2. Till the 2016 17 budget the Union Budget was presented on the last working day of February every year. From 2017-18, the practice has changed and it is now presented on the first working day of February every year.