GOVERNMENT EXPENDITURE
Govt. expenditure is spending made by the government of a country on collective needs and
wants such as pension,
provision, infrastructure,
etc.[1] Until the 19th century, public
expenditure was limited as laissez faire philosophies believed that money left
in private hands could bring better returns. In the 20th century, John Maynard Keynes argued the role of public expenditure in
determining levels of income and distribution in the economy.
Since then government expenditures has shown an increasing trend.
In the 17th and the 18th century Public
Expenditure was considered as a wastage of money.Thinkers said Government
should stay with their traditional functions of spending on defence and
maintaining law and order.
THEORIES OF GOVT. EXPENDITURE
Several theories of
taxation exist in public economics. Governments at all levels (national, regional and local) need to raise
revenue from a variety of sources to finance public-sector expenditures. The
details of taxation are guided by two principles: who will benefit, and who can pay.
Dalton’s Principle of Maximum Social Advantage. Graph showing point of
Maximum Social Advantage at point "P"[2]
PRINCIPLE OF MAXIMUM SOCIAL ADVANTAGE
Taxation (government revenue)
and government expenditure are
the two tools. Neither of excess is good for the society, it has to be balanced
to achieve maximum social benefit. Dalton called this principle as “Maximum
Social Advantage” and Pigou termed
it as “Maximum Aggregate Welfare”.
Dalton’s Principle
of Maximum Social Advantage-
Maximum satisfaction should be yield by striking a balance between public
revenue and expenditure by the government. Economic welfare is achieved when
marginal utility of expenditure = marginal disutility of taxation. He explains
this principle with reference to
·
Maximum
Social Benefit (MSB)
In the given figure “P” is the point of
Maximum Social Advantage. At this point MSS=MSB.
At a point before P, i.e. “P1” P1S1 > Q1S1 which implies MSB>MSS. And at point after P, i.e. “P2” MSS>MSB asQ2P2>S2P2.
Pigou’s Principle of Maximum Aggregate Benefit. Graph showing point of
Maximum Aggregate Benefit at point "E"
VOLUNTARY EXCHANGE THEORY OF LINDHAL
It was introduced by Swedish Economist “Erik Lindahl in
1919”.[4] According
to his theory, determination of public expenditure and taxation will happen on
the basis of public preferences which they will reveal themselves. Cost of
supplying a good will be taken up by the people. The tax that they will pay
will be revealed by them according to their capacities.[5]
CAUSES OF GROWTH
OF PUBLIC EXPENDITURE
Even though public expenditure came into
picture in the 20th century, accelerating growth of governmentexpenditure began in the
late 1970s.
There are several factors that have led to
enormous increase in public expenditure through the years
·
Defense
Expenditure-due to modernization of defense
equipment by navy, army and airforce to prepare thecountry for war or for prevention.
·
Population growth- It increases with the increase in population, more of investment is required to be done by government on law and order, education, infrastructure, etc.
investment in different fields depending on the different age group is
required.
·
Welfare
activities- welfare, mid-day meals, pension
provisions etc.
·
Provision of
public and utility services-provision of basic public goods given
by government (their maintenance and installation) such as transportation.
·
Accelerating
economic growth- in order to raise the standard of
living of the people.
·
Price rise- higher price level compels government to spend increased amount on
purchase of goods and services.[7]
·
Increase in
public revenue- with rise in public revenue
government is bound to increase the public expenditure.
·
International
Obligation- maintenance of socio economic
obligation, cultural exchange etc. (these are indirect expenses of government)
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