CHAPTER EIGHT
ALLOCATION OF PUBLIC EXPENDITURE RESPONSIBILITIES
8.1. Meaning of Public Expenditure
Public expenditure is not only the most important but also the central part of the study of public finance. It
is incurred by the government for the attainment of public good. Every government has to maintain law
and order, armed forces for providing protection, public parks, schools, health etc. of the people.
Government has to perform certain other welfare measures like maternity protection, arranging for cheap
food, cloth and low-cost housing for the poor and so on. All these multifarious activities which are
increasing every year require huge fund. Public expenditure, thus occupies the same important place in the
study of public finance that consumption occupies in the study of economics.
In economics, public expenditure is the value of goods and services bought by the State and its
articulations. It plays four main roles: current effective demand; coordinated impulse on the economy,
which can be used for stabilization, business cycle inversion, and growth purposes; public endowment of
goods for everybody and positive externalities to economy and society, the more so through its capital
component. It plays these economic roles through economic variables: GDP, consumption, prices,
employment, etc. Public expenditure has an immediate impact on GDP. An increase of public expenditure
raises GDP by the same amount, other things equal. Moreover, since income is an important determinant
of consumption, that increase of income will be followed by a rise in consumption: a positive feedback loop
has been triggered between consumption and income, exactly as in the case of shocks in export,
investment or autonomous consumption.
In more microeconomic terms, public expenditure may be directed to consumer goods and thus substitute
families' expenditure, as with the case of health drugs. By contrast, in other cases, as with education,
public expenditure may trigger further consumption (books and all the other goods whose consumption
depend on culture levels).
Public Expenditure is incurred by public authorities – Central, State and Local Governments – either for the
satisfaction of collective needs of the citizens or for promoting their economic and social welfare. They can
finance expenditures through taxes, public debt, money emission, and international aid.
8.2. Objectives and Principles of Public Expenditure
a) Objectives of Public Expenditure
Dalton divided the aims of public expenditure in broader two parts i.e. the functions of government.
(i) Security of life against the external aggression and internal disorder and injustice.
(ii) Development or up gradation of social life in the community. These functions can be
broken down in to more detailed functions as:
1. The public authority works in many ways for the benefit of the people. These include the
generalized services like public health and education. The whole society is benefited by these
functions of the State.
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2. Secondly, through public expenditure, the government influences directly or indirectly, the
industrial and commercial system of the nation thereby helps towards the economic and social
development of the society.
3. Thirdly, in modern times, the responsibilities of the government are increasing every year. For the
economic development of the country, the government has started, on its own accord, industries and
commercial businesses. This sector of the economy which is under the direct control of State has
come to be known as public sector. Expenditure on this sector is increasing rapidly every year. In an
underdeveloped economy, this aim of public expenditure has attained great significance.
4. Fourthly, Dalton points out that the public expenditure should be carried on up to that limit
where the marginal benefit arising from different branches of expenditure are equal. These marginal
benefits must be equal to the marginal sacrifice incurred by the public.
5. Public spending should be designed to optimize the level of investment in such a way as to
maintain full employment – with growth.
6. Public Spending may be incurred at an increasing rate in the backward region to uplift their
economy.
b) Principles of Public Expenditure
In economic literature, the expression “Canons of public expenditure” is used for the fundamental rules or
principles governing the spending policy of the government. The following canons of public expenditure
have been laid down by many scholars on the subject:
(1) Canon of Benefit: - this canon suggests that every public spending must ultimately be used for
the cause of social benefit i.e. for the general well-being of the common people. In other words, the State
spending should confer benefits on the entire community at large than on an individual group or section.
It means public funds should be spending in such directions which pursue common interest and promote
general welfare.
(2) Canon of Economy: It implies that public expenditure should be incurred carefully and
economically. Economy here means that wasteful and extravagant expenditure should be avoided at all
levels. Public expenditure must be productive and efficient. Hence, it must be incurred only on very
essential items of common benefit – without duplication in a way that involves minimum cost. An
efficient system of financial administration is therefore, very essential in any country.
(3) Canon of Sanction: this canon suggests that no public spending should be made without the
approval of proper authority. Only obtaining prior sanction is not sufficient. It must be properly
inspected and examined whether the sanctioned amount of money spent on the purpose for which it is
sanctioned by the highest authority and accounts properly audited.
(4) Canon of Surplus: this canon suggest that saving is a virtue even for the government, so an ideal
budget is one which contains an element of surplus by keeping public expenditure below public revenue. In
other words, public authorities should aim at surplus of income over expenditure and they should avoid
deficits. Frequent and huge deficits lead to uncontrollable financial situation with dire consequences of
inflation. Therefore every government should attempt to balance its income and expenditure.
(5)Canon of Elasticity: this canon requires that the expenditure policy of the State should be such that
changes must be possible in the expenses according to the changes in requirements and circumstances. In
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other words, there should be scope for changes in public expenditure according to the requirements of the
country.
(6)Canon of Productivity: this canon or principle implies that the expenditure policy of the Government
should be such that would encourage production in a country. That means a large part of public
expenditure must be allocated for development purposes.
(7)Canon of Equality: one of the foremost aims of public expenditure is also to ensure the just and
equitable distribution of income by conferring benefits on the poorer section of the community. This
canon of equitable distribution is more significant for the countries where the gap between the highest
income and the lowest income groups is very wide. Developing countries like Ethiopia, have given this aim
a significant and particular importance in the economic activities of the State and in their fiscal policies.
8.3. Roles of Each Layer of Governments
Public expenditure is determined by political will of the leading forces in the state: their priorities, their desired state
model, and their interpretation of current economic and political phase. Past choices have relevant impact on public
expenditure because of inertia and instrumentalism. Bureaucracy may play an important decision role for the actual
expenditure. Sometimes considered as a completely exogenous variable, the public expenditure would thus
be fully in the hand of political decision-makers without dependency from the economic context.
With its prioritized structure and its peculiar decision-making processes, public expenditure substantiates
the prevailing kind of State. In democracy, public expenditure is an expression of people's will, managed
through political parties and institutions. At the same time, public expenditure is characterized by a high
degree of inertia and law-dependency, which tempers the will of the current majority.
In particular, as avery sketched framework, one may distinguish at least three general models of state
to which public expenditure corresponds: There are:-
1. The minimal state, where only justice, public order, foreign policy and some other basic functions
should be carried out by the state, relying on private initiative for the others;
2. The welfare state, where the State cares about the people's well-being directly, also through expenditure
in schooling, health, support for the poor, the old, the disadvantaged,
3. The developmental state, where the State takes the responsibility of fostering economic development,
also through expenditure in infrastructure, support for firms, export and production in general.
Both the welfare and developmental state include the items of the minimal state. Military expenditure and
special policies are common traits of the three models, maybe in different proportions. Comparing
function shares in public expenditure, one can get insights in the kind of state under analysis.
Needless to say, the State does not exert its influence on economy and society through public
expenditure only, but also for example through laws.
8.3.1. Allocation of Expenditure Responsibilities
In the study of the system of the division of expenditure responsibilities in a federal system, there should be
careful consideration of the following points. First, it intertwines with the system of distribution of powers
between the federation and the states. In this regard, the constitutional techniques for the allocation of
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powers in general and the scope of the powers allocated to each tier of government in particular results the
functions of each tiers of governments, then follows the need to implement those assigned function through
policies which, in turn requires expenditures. The „division‟ of expenditure responsibilities is also called the
'assignment' of expenditure responsibilities in much of the literature.
The distribution of expenditure responsibilities in a federal system corresponds with the division of
legislative as well as executive powers between the tiers of government. Legislative costs are
insignificant compared to administrative costs. However, legislative power is essential to understand the
extent of a government's expenditure responsibility.
The actual division of expenditure responsibility deals mainly with the interrelated aspects of the division of
legislative and executive powers. Central to this issue is which responsibilities or authorities are divided
between the levels of government. In some federations, like the USA, the legislative, executive, judicial and
financial powers are divided between the federal government and the states, and then the expenditure
responsibility becomes coextensive with the legislative responsibility of each level of government. In other
federations, like Germany, the legislative power is mainly entrusted to the federal government while the
executive power is mainly reserved to the states. (We will discuss both of these in the next subtopics).
8.4. Main areas of Expenditure Responsibility: capital and recurrent
Technically, in the structure of a budget, most governments classify expenditure into two.
(i) Recurrent expenditure, and (ii) Capital expenditure.
All sorts of administrative costs such as salary, and defense expenditure and debt services are called
recurrent expenditure. They are also referred to as non-developmental expenditure. They are intended for
continuing the existing flow of goods and services and maintaining the capital of the country intact. On
the other hand, capital expenditures contribute to increased productive capacity of the nation and therefore,
are known as development expenditure. Expenditures on construction of dams, public works, state
enterprises, agricultural and industrial development etc., are instances of capital expenditure.
Though public expenditure is a means of maintaining the capital of the country intact, it is not merely a
financial mechanism, it is rather a means of securing social objectives. Socialism can be realized only
through progressive taxation and their distribution afterwards. Therefore, public expenditure is that
expenditure incurred by the public authorities i.e. Central, State and Local governments, to satisfy
those common wants which the people in their individual capacity are unable to satisfy efficiency
wants.
8.5. The Constitutional Methods for the Division of Expenditure Responsibility: the
USA and Germany Experiences
In this sub topic, the material discusses about the experiences of some of the federation, selection is made
to USA and Germany. Why the selection is made to USA and Germany than other federation is the
question that follows. The selection to the above named federations has some ramifications. The US
federation, for its pioneer and complex of federalism and the constitutional base of individualism and
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liberalism totally far from the spirit of FDRE constitution albeit, the mechanism of allocation is to some
extent similar. The German experience is the best identified to its moderate lubrication the tension of highly
ethicized federalism, which is common in other federations like Switzerland, Canada, Belgium, etc. Thus,
the two selected federations teach the Ethiopian system lessons to harmonize the individual rights and
group rights which are enshrined in the FDRE Constitution. In addition, the allocation of power and
function which seek expenditure has also the same benefit.
8.5.1. USA Experience
The USA is a three-tier federation consisting of central government, states and local governments of
various types. There are at least three unique features of fiscal system of the USA. First, it is one of the
countries where fiscal federalism has had a long history and the fiscal framework is deeply embodied in the
federalist spirit of the constitution. Second, it is the most diversified and complex system. For one
thing, the state fiscal system is very diverse, and so is the degree of fiscal decentralization.
The third and the most striking features of the US fiscal federalism, in spite of its high complexity and
diversity, is that there has been much stability. On the one hand, the fiscal structure has been the most
flexible by any standards. This can be evidenced by the expanding role of inter- governmental transfers
and the reassignments of fiscal responsibilities over times. The central instrument of expenditure policy is
the budget. The four steps involved in the budget cycle are (1) formulation of the president’s budget by the
executive branch, (2) appraisal of the president’s budget by the congress and budget legislation, (3) the
execution of this legislation by the executive branch and (4) auditing by the General Accounting Office
(GAO).
8.5.2. Germany Experience
The German Basic Law (Grudgesetz) defines a strict federal system whose dominant elements and
actors are the Lander (states) and their Gemeinden (local administration), not the top
administrative level, the Bund (center). The Constitution is one of “moderate separation” or
“cooperative federalism”. The moderation is explained through three aspects. First, each level has
its specific task and duties as well as some taxable source – but not the general right to tax – for
fulfilling its duties. Second, some tasks as well as some revenue sources are not exclusively
assigned to one level, but instead are shared by two or even three administrative levels.
Thirdly, there is legally fixed mechanisms which allows for an inter-Lander and inter- Gemeinden
equalization of fiscal and economic power.
8.6. Division of Expenditure Responsibility under FDRE Constitution
The two dimensions of expenditure responsibility in Ethiopia.
8.6.1. Allocation of powers and functions under FDRE Constitution
In the Ethiopian federal system, the Constitution follows an approach of listing the exclusive powers
and functions of the federal government (Art.51). It also provides a limited list of exclusive powers for the
states (Article 52(2)). It mentions the source and type of taxes for which the states may exercise exclusive
power. In principle, the Ethiopian Constitution follows the USA model by enumerating the powers of the
center and allocating the residual powers to the states, but it also incorporates some features from India and
Canada by listing some powers for the states.
In general, according to the Constitution, we can divide the powers and functions of the central
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government into four groups. The first group comprises those powers which by their very nature are
considered to be the common concern of all the constituent units of the federation. In all federations, they
are assigned to the central government. In this category of power, we may find national defense,
international or foreign relations, citizenship, immigration and naturalization, and other powers that are
supplementary to the main powers in this category. The Ethiopian Constitution (Article 55(7)) explicitly
empowers the center to organize national defense, public security and the federal police force.
In the second group, several commercial powers that are essential for facilitating as well as international
trade can be mentioned (taxation is independently dealt with in the next chapter). In this group, we find the
largest category of powers, including interstate commerce; postal and telecommunication services; weights
and measures; domestic currency coinage and foreign currency usage; and banking, insurance, patents
copyright. These powers are assigned to the federal government primarily for economic reasons and for
practical convenience. In all federal countries the central government power over currency and legal
tender, but they may differ on regulating banking by giving a concurrent power to the states. In Ethiopia,
however the central government has the power over monetary and fiscal policy, local currency, the
administration of the national bank and foreign exchange. Under the Ethiopian Constitution regulating
insurance is not specifically mentioned as the power of the center. Impliedly, extended from the exclusive
mentioned interstate trade, the center assumes it.
Under the Ethiopian Constitution, rail, air and water transports and major roads linking two or more states
are within the competence of the federal government. The legislative power of the federal legislature also
extends to the labor and commercial codes. The FDRE Constitution does not enumerate those issues
covered under the labor code such as employment contracts, trade unions, industrial and labor disputes.
Nor does it mention various legal concepts included under the commercial code, such as partnerships and
bankruptcy.
The third group comprises legislation dealing with various aspects of social and political issues. In
Ethiopia, the federal legislature (HOPR) may legislate on matters concerning electoral laws and
procedures, as well as the enforcement of political rights established by the constitution. Some of the issues
that may fall under the latter are press law, demonstrations and the registration of political parties.
The fourth group comprises civil and criminal laws. The FDRE Constitution enactment of the penal code
is a federal matter. The states, however, may enact legislation on matters that are not covered by the
penal code. The power over civil laws (e.g. the law of family and succession) is left to the states. The
center may enact civil law when the House of Federation considers that it is essential for employing
uniform law in order to establish and sustain one economic community. In Ethiopia, those cases
categorized under the fourth group mainly entail law-making power at the center while, in practice,
reserving the regulating and adjudicating power to the states.
The Constitution provides the states with a legislature, an executive and judiciary which are constitutionally
independent from the central government in matters assigned to them. However, it is important to note that
when powers assigned to each level of government are not mutually exclusive, there may be a greater
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possibility of encroachment on the power assigned to the other. This is because it is practically impossible
to bring about a total power separation between the two levels of government, although the interrelationship
between them may vary from one program to the other. Accordingly, the Ethiopian Constitution reserves
residual power to the states. Article 52 provides all powers not given expressively to the federal
government alone or concurrently to the federal government and the states are reserved to the states. With
regard to the residual power of taxation, however, the Constitution has another saving clause that does not
automatically allocate it to the states: it is to be decided by a joint meeting of both Federal Houses
(Article 99). Moreover, the Constitution reserves major policy matters governing education, health,
environment, science and technology and development strategies to the center which may broaden the
power of the federal government over residual matters (Articles 51 (2 and3), 89-92).
Under Article 52(2) of the Constitution, the states have enumerated powers and functions. These powers
include the establishment of state police power, the maintenance of public peace and order, levying and
collecting taxes and duties on revenue sources reserved to states, the administration of land and other
natural resources based on federal laws, and the employment and
Working conditions of civil servants. The states also have power over such areas as education, health and
agriculture although the federal government has the power to set national standards. In addition, the States
have independent power with respect to matters not mentioned in the federal list. However, it should be
noted that the states may not have legislative power over residual powers. The Constitution has two
provisions which limit the residual power of the states. The first concerns the taxation power, and the
second is with regard to enactment of civil laws (Article 98 and 55 respectively). The regions cannot
immediately assume the power of taxation that is not specifically provided by the Constitution either the
center, the regions, or concurrently to both. It has to be determined by a joint session and a two-thirds
majority vote in the HOF and HOPR is required. Similarly, the federal legislature may enact civil laws
if the House of Federation deems it necessary.
In addition, the limits of power assigned and the relations between the central and regional
governments in relation to education, public health, and other social services have not become clear. For
instance, the Constitution in its Article 51(3) provides that„ [the federal government] shall establish and
implement national standards and basic policy criteria for public health, education, science, and
technology as well as the protection and preservation of cultural and historical legacies‟
In practice, there is a general policy at the federal level and regions also have policies in most cases
replicating the federal policy. The Constitution under its Article 51(2) provides '[the federal government
shall] formulate and implement the country's policies, strategies and plans in respect of overall economic,
social and development matters.' At the same time, the regions have the power 'to formulate and execute
economic, social and development policies, strategies and plans of the state' (Article 52(2, c). The
Constitution does not spell out the relevance of similar policies at the central and regional levels at the
same time. Nor does it indicate any restriction imposed upon the regions to act in areas left by the
center or in areas authorized by the central government like that of the German and the Swiss
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Constitutions. Such cases may lead to inconsistencies between the federal and regional laws or policies.
But this overlap of power of the respective governments can be clarified when seen in relation to the
contents of power of the respective governments. For instance, in Ethiopia tertiary education is a federal
matter whereas primary education falls within the state jurisdiction. Thus, the repetition could be avoided if
the federal policy addresses higher education and states‟ policy focus on the major parts of primary
education. At present the policies are issued at the federal level after being discussed and approved by
the meetings of the ruling party.
The FDRE Constitution does not explicitly mention framework legislation like that of the German Basic
Law. However, we can argue for the application of the principle of framework legislation in the
Ethiopian federal Constitution. For instance, the federal government has the power to establish
national standards and basic policy criteria for public health, education as well as for the protection
and preservation of cultural and historical legacies. The federal government is involved in setting
standards and basic policies, but the states are the major actors in the provision of education, public
health and the protection of cultural and historical legacies. This division of power requires general,
structured federal legislation and detailed state/local laws. Furthermore, both the federation and a state
have the power to formulate social, economic, and development strategies and policies for the country
and the state respectively. The Constitution does not expect conflicting policies to be applicable at
the same time. There are several options for this provision to be applicable. If policies determined by the
federation remain as framework legislation, a state may determine specific policies addressing local
needs. Presently there are several policies which have been decided by the federation and the states
have acceded to them, implying the need for the uniformity of policies and laws throughout the
federation. However, as we can see from the FDRE Constitution, there is a need for framework legislation
for setting uniform standards and policies whereas the details are left to the member states since the
expenditure responsibilities lie with them.
References: -
Modules of mekelle university.
Course syllables (outline) of federalisms.
Modules of federalism
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