Thursday, January 13, 2011

Principles of Public Expenditure

Public expenditure is related to macro economics. Public ecpenditure has some principles. Public Expenditure contain following Principles:

  1. Principle of maximum social benefits
  2. Principle of economy, i.e., wasteful expenditure should be avoided
  3. Canon of sanction, i.e., authorized expenditure
  4. Principle of balanced budget
  5. Canon of elasticity, i.e., fairly flexible
  6. Avoidance of unhealthy effects on production and distribution
 1. Principle of Maximum Social Benefits: 
Public expenditure should be made to attain the maximum social advantage from activities conducted by it.
 Attainment of maximum social advantage requires: 
(i)                  both public expenditure and taxation should be carried out up to certain limits and no more,
(ii)                public expenditure should be so utilized among the various uses in an optimal manner:
(iii)               the different sources of taxation should so tapped that the aggregate sacrifice entailed is minimum

2. Principle of Economy: It means that extravagance and waste of all types should be avoided.  Public expenditure has great potentiality for public good but it may also prove injurious and wasteful.  If the revenue collected from the taxpayer is heedlessly spent, it would be obviously uneconomical.
To satisfy the canon of economy, it will be necessary to avoid all duplication of expenditure and overlapping of authorities.  Further, public expenditure should not adversely affect saving.  In case government activity damaged the individual’s will or power to save, it would be repugnant to the canon of economy.
3. Canon of Sanction: Another important principle of public expenditure is that before it is actually incurred, it should be sanctioned by a competent authority.  Unauthorised spending is bound to lead to extravagance and over-spending.  It also means that the amount must be spent on the purpose for which it was sanctioned.  Allied to the canon of sanction, there is another, viz., auditing.  A postmodern examination is equally important.  That is, all the public accounts at the end of the year should be properly audited to see that the amounts have not been misappropriated or mis-spent.
4. Principle of Balanced Budget: Every government must try to keep its budgets well balanced.  There should be neither ever-recurring surpluses nor deficits in the budgets.  Ever recurring surpluses are not desired because it shows that people are unnecessarily heavily taxed.  If expenditure exceeds revenue every year, then that too is not a healthy sign because this is considered to be the sign of financial weakness of the country.  The government, therefore, must try to live within its own means.
5. Canon of Elasticity: Another same principle of public expenditure is that it should be fairly elastic.  It should be possible for public authorities to vary the expenditure according to the needs.  A rigid level of expenditure may prove a source of trouble and embarrassment in bad times.  Alteration in the upward direction is not difficult.  But elasticity is needed most in the downward direction.  It is not so easy to cut down expenditure.  When the economy axe is applied, it is a very painful process.  Retrenchment of a widespread character creates serious social discontent.  Perfect elasticity is out of question.  But a fair degree of elasticity is essential if financial breakdown is to be avoided at the time of shrinking revenue.
6. Avoidance of Unhealthy Effects on Production or Distribution: It is also necessary to see that public expenditure exercises a healthy influence both on production and distribution of wealth in the community.  It should stimulate productive activity so that the volume of production in the country increases and it may be possible to raise the standard of living.  But this object of raising of the standard of living of the masses will be served only if wealth is fairly distributed.  If the newly created wealth goes to enrich the already rich, the purpose is not served.  Public expenditure should aim at toning down the inequalities of wealth distribution.  These two objectives may be in conflict when attempts at reducing inequalities of income and wealth distribution adversely affect production.  This it can do by adversely affecting: 
(i)                  power to work and save, and
(ii)                will to work and save
Public expenditure can also benefit production through diversion of resources from less productive to more productive occupations.
As for (i) power to work and save, it may be pointed out that much of the socially desirable public expenditure incurred by modern governments undoubtedly increases the community’s productive power and, consequently, also the power to save.  Such expenditure includes provision of means of communication and transport; education, public health, scientific and industrial research; controlling of human, animal and plant diseases and expenditure on social insurance, like health insurance, unemployment insurance and old age pensions.
As for (ii) the will to work and save, much depends on the character of public expenditure and the policy governing it.  By giving the people expectations of future benefits from public expenditure, it may blunt the edge of the desire to work and save.  The granting of old age pensions, insurance against sickness and unemployment and provision of education of state expense must make the people indifferent towards the future and make them neglect savings.  People will work less.  But if such expenditure is kept within proper limits and if it helps the really helpers, the check on savings may be mitigated.  But when taxes are too heavy, the people’s will to work and save may be discouraged and their power to do so reduced.  That limit should not be reached.