Chapter 3

Public Expenditures

BBA 8th Semester Bakhtar University

To study the nature of expenditures and objectives for which, the various expenses are incurred.

So important for the state as the personal expenditures for the persons.

Like a man, the activities of the state also move around revenues raising and spending.

Concept and Nature

The state has to perform so many functions: law and order to social welfare & economic development. The expenditures made by government to carry out all such functions are simply known as government expenditures.

The govts used to make expenditures to save their citizens from internal and external aggression (Laisseze-faire economy).

Concept and Nature

The issues of free-enterprise economy became highlighted with passage of time.

Capitalism badly collapsed during 1930s great depression and state intervention was considered necessary in the economic affairs of the country(Keynesian Revolution).

It was thought necessary to increase govt expenditures to remove unemployment and other distortions.

Classification of Public Expenditures

1. Classification on the Basis of Benefits2. Classifications on the Basis of Functions3. Classification on the Basis of Revenues4. Classification on the Basis of Importance

Classification on the Basis of Benefits (Prof. Cohen & Pelhin)

1. Expenditures which lead to overall benefits like law & order, administration, legislation, education, building of roads and transportation.

2. Those which lead to benefits of specific people like justice, social security to the labors, pension and unemployment insurance.

3. Those which benefit some particular group of the society like subsidies to different businesses.

This sort of classification, no doubt, analyses the nature of benefit conferred on the people, but it is defective and imperfect because we cannot easily know whether a particular expenditure is useful for a particular section or for the society as a whole.

Classification on the basis of Revenue

Nicholson has based his classification of public expenditure on the amount of revenue received by the state in return of the services which it renders.

Expenditure without direct return of revenue e,g poor relief or war expenditure.

Expenditure without direct return but indirect benefit to revenue.e.g,expenditure on education.

Expenditure with full return or even with profit, for example,gas charges, water supply etc.

Classification on the Basis of Functions (Adam Smith )

1. Protective Expenditures: Purchase armory, make arrangements for police, army, prison and judiciary etc.

2. Commercial Expenditures: Expenditures made for the purpose to facilitate commerce. Examples include canals, bridges, and railway system.

Classification on the Basis of Importance (Prof. Sherras)

1. Basic Expenditures These are faced in connection with the

discharging of basic functions like defense, repayment of debt and provision of law and order.

2. Secondary Expenditures All other expenditures like provision of higher

education, entertainment,publichealth etc are termed as secondary expenditures.

Rather vague since the terms primary and secondary have no fixed meaning and can change with change in circumstances.

For example, nowadays expenditure on education, public health and infrastructure are considered as primary.

Factual Position—Economic Classification

Discussed earlier are important form theoretical point of view.

Most countries have adopted economic classification: Revenue Account: Short Run Capital Account: Long Run

Economic Classification The budget is divided now into:

Revenue Budget: Income and expenditure on revenue account like all current expenditures on administration including defense, railway, posts and telegraph etc.

Capital Budget: Income and expenditure on capital account. Includes all capital transactions like acquisition of assets like land, building, machinery etc.