PUBLIC FINANCE

(PUBLIC EXPENDITURE)
Lecture 06
Dr. Gulzar Khan
PIPFA, Islamabad
 SYLLABUS

• Concept, nature and classification of Public Expenditure

• Cannons of Public Expenditure. Cannons of Financial propriety
• Wagner’s Hypothesis
• Effects of Public Expenditure
• Why governments do spend on Education, Health and Social Protection?
• Why governments pay grants and subsidies?
• The Schedule of authorized expenditure
 EXAM QUESTIONS
• Enlist the development and non-development expenditures of Government. S.23
• How Public Expenditures can be used to curb inflation in the economy? S.22
• Discuss the role of Public Expenditures for bringing about Economic Stability in an economy. S.22
• How does Public Expenditures helpful to overcome recession? W.22
• There are several principles suggesting maximization of gain of Public Expenditures. These principles
are called canons of Public Expenditures. Explain four basic canons of Public Expenditures presented
by Prof Findlay. S.22
• Explain the Canon of Benefit as a criterion for evaluating Public Expenditures. W.23
• Briefly explain the canon of Elasticity and canon of Surplus of Public Expenditures. S.23
• Briefly explain the long-term benefits of Government investments in education, health, and social
protection. Briefly explain canons of Public expenditures. W.23
• On what grounds Wagner’s hypothesis regarding the growth of Public Expenditures is criticized? S.23
Public Expenditure definition:
• Expenses incurred by the public authorities—central, state and local- governments—
are called public expenditure. Such expenditures are made for the maintenance of the
governments as well as for the benefit of the society as whole.

• The classical economists did not analyse in depth the effects of public expenditure, for
public expenditure throughout the nineteenth century was very small owing to the
very restricted Government activities.
• The Governments followed laissez faire economic policies and their functions were
only confined to defend the country from foreign aggression and to maintain law and
order within their territories. But now, the expen­diture of Government all the world
over has greatly increased. Therefore, the modern econo­mists have started analysing
the effects of public expenditure on production, distribution and the levels of income
and employment in the economy.
 THE MAIN ITEMS OF GOVERNMENT SPENDING
• Social services such as education, health and welfare and social security; defence, that
is the cost of maintaining the armed forces; spending on roads, transport services, law
and order, housing, interest payments on money borrowed by the government.
• Since national income is a fixed number, spending in one direction can be achieved
only at the expense of spending elsewhere. Thus, if the govern­ment spends a larger
part of the national income on defence, less will remain with the people for their own
personal consumption, thereby leading to a reduction in their standard of living.
• Similarly, too large an expenditure on the social services at the expense of defence
expenditure may put a threat to national security – and social security is meaningless
if it is at the expenses of national security. As a result, the actual amount spent in each
direction represent a compromise between competing desires. So, there is always a
need for careful planning of public expenditure.
 IMPORTANCE OF PUBLIC EXPENDITURE:
• Thanks to the macroeconomic theory advanced by J.M. Keynes, the role of public expen­diture in the
determination of level of income and its distribution is now well recognised. Keynesian macroeconomics
provides a theoretical basis for recent developments in public expenditure programmes in the
developed countries.
• The public expenditure can be used as a lever to raise aggregate demand and thereby to get the
economy out of recession. On the other hand, through variation in public expenditure, aggregate
demand can be managed to check inflation in the economy.
• Public expenditure can also be used to improve income distribution, to direct the allocation of resources
in the desired lines and to influence the composition of national product. In the developing countries
also, the role of public expenditure is highly significant.
• In the developing countries, the variation in public expenditure is not only to ensure eco­nomic stability
but also to generate and accelerate economic growth and to promote employment opportunities. The
public expenditure policy in developing countries also plays a useful role in alleviating mass poverty
existing in them and to reduce inequalities in income distribution. In what follows, we shall study the
types of public expenditure, the causes of growth of public expenditure and its effects on production,
distribution and economic growth in both the devel­oped and the developing countries
 CANONS OF PUBLIC EXPENDITURE
1. PRINCIPLE OF MAXIMUM SOCIAL BENEFIT:

• It is necessary that all public expenditure should satisfy one fundamental

test, viz., that of Maximum Social Advantage. That is, the government should
discover and maintain an optimum level of public expenditure by balancing
social benefits and social costs. Every rupee spent by a government must
have as its aim the promotion of the maximum welfare of the society as a
whole.
• Care has to be taken that public funds are not utilized for the benefit of a
particular group or a section of society. The aim is the general welfare.
Government exists for the benefit of the governed and the justification of the
government expendi­ture is, therefore, to be sought in the benefit of the
community as a whole.
 2. CANON OF ECONOMY:

• Although the aim of public expenditure is to maximize the social benefit, yet it does
not exonerate government from exercising utmost economy in its expen­diture.
Economy does not mean miserliness. It only means that extravagance and waste of
all types should be avoided. Public expenditure has great poten­tially for public good
but it may also prove injurious and wasteful. Thus, if revenue collected from the tax
payer 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 over-lappying 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 go against the canon of economy.
 3. CANON OF SANCTION:

• Another important principle of public expenditnciple 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. Not only is
previous sanction of public expenditure essential but apost-mordem
examination is equally imperative. That is, all the public accounts at the end
of the year should be properly audited to see that the amounts have not
been misspent or misappropriated.
 4. CANON OF ELASTICITY:

• Another sane principle of public expenditure is that it should be fairly elastic. It should be possible
for public authority to vary the expenditure according to need or circumstances. A rigid level of
expenditure may prove a source of trouble and embarrassment in bad times. Alteration in the
upward direction in not difficult.
• It is easy, rather tempting, to increase the scale of expenditure. But elasticity is needed tempting,
to increase the scale of expen­diture. But elasticity is needed most in the downward direction.
When the economy axe is applied it is a very painful process. Retrenchment of a wide­spread
character creates serious social discontent.
• It is very necessary, therefore, that when the scale of public expenditure had to be increased, it
should be increased gradually. A short spell of prosperity should not lead to long-term
commitments. A fair degree of elasticity is essen­tial if financial breakdown is to be avoided at a
time of shrinking revenue.
 5. NO ADVERSE INFLUENCE ON PRODUCTION
OR DISTRIBUTION:

• It is also necessary to ensure that public expenditure should exercise a

healthy influence both on production and distribution of wealth in the
community. It should stimulate productive activity so that income and
employ­ment of the living. But this object of raising of living standards of the
masses will be served only if wealth is evenly distributed. If newly created
wealth goes to enrich the already rich, the purpose is not served. Public
expenditure should aim at reducing the inequalities of wealth distribution.
 6. PRINCIPLE OF SURPLUS:

• It is considered a sound or orthodox principle of public expenditure that as far

as possible public expenditure should be kept well within the revenue of the
State so that a surplus is left at the end of the year. In other words, the
govern­ment should avoid deficit budget, But the modern economists,
especially Keynes, do not regard surplus budgeting as a virtue, rather deficit
budgeting is more useful in raising the levels of income and employment in
the under­developed countries. All the same, budget deficits running over a
series of years are considered bad for the financial stability of the country
and they cause inflation which is injurious to the health of the economy.
 REVENUE EXPENDITURE AND CAPITAL
EXPENDITURE:
• Public expenditure has been classified into various categories. Firstly,
Government expenditure has been classified into revenue expen­diture and
capital expenditure. Revenue expenditure is a current or consumption
expenditure incurred on civil administration (i.e., police, jails and judiciary),
defence forces, public health and education.
• This revenue expenditure is of recurrent type which is incurred year after year.
On the other hand, capital expenditure is incurred on building durable assets. It
is a non-recurring type of expenditure. Expenditure incurred on building
multipurpose river projects, highways, steel plants etc., and buying machinery
and equipment is regarded as capital expenditure.
• Transfer Payments and Expenditure on Goods and Services. Another useful classifica­tion of public
expenditure divides it into transfer payments and non-transfer payments. Transfer payments refer to
those kinds of expenditure against which there is no corresponding transfer of real resources (i.e.,
goods and services) to the Government.
• Expenditure incurred on old-age pensions, unemployment allowance, sickness benefits, interest on
public debt during a year etc., are examples of transfer payments because the Government does not
get any service or goods against them in the particular year.
• On the other hand, expenditure incurred on buying or using goods and services is a non-transfer
payment as against such an expenditure, the Government receives goods or services. It is therefore
called expenditure on goods and services. It may be noted that expenditure on defence, education,
health etc., are non-transfer expenditure as in return for these, Government obtains the services of
army personnel, teachers, doctors etc., as well as some goods or equipment’s used in these
activities.
• Investments expenditure is undoubt­edly non-transfer expenditure as through it Government obtains
capital goods. It is worthwhile to mention that whereas in case of transfer payments, it is the
beneficiaries that decides about the use of resources, in the case of non-transferable type of
expenditure, the Government itself decides about the use of real resources, especially whether they
are to be used for consumption or investment purposes.
 DEVELOPMENTAL AND NON-
DEVELOPMENT EXPENDITURE:
• Another useful classification of public expenditure rests on whether a particular
expenditure by the Government promotes development. All those expenditures of
Government which promote economic growth are called developmental expenditure.
• Expenditure on irrigation projects, flood control measures, transport and
communication, capital formation in agricultural and industrial sectors are de­scribed as
developmental. On the other hand, expenditure on defence, civil administration (i.e.,
police, jails and judiciary), interest on public debt etc., are put into the category of non-
development expenditure.
• It may be noted that, till recently, expenditure on education and health were regarded
as non-developmental type. It has now been realised that the expenditure on education
and public health promotes the growth of what is called human capital which promotes
economic growth as much as physical capital, if not more. Therefore, these days,
expenditure on education, research and health are generally regarded as devel­opmental
expenditure.
• It is worth noting that division of Government expenditure into
developmental or non-de­velopmental is the modern counterpart of the
distinction drawn by classical economists between productive and
unproductive public expenditure, which has been a subject of great
controversy.
• For instance, it has been pointed out that even Government expenditure on
defence and civil administration helps to maintain conditions in which
productive activity can be carried out. It is, therefore, claimed by some that
indirectly, expenditure on defence and civil administration is also
productive.
• Thus, we see that what Government expenditure is developmental or pro­
ductive and what non-developmental or unproductive is not based on any
objective or fool-proof criteria and is therefore somewhat arbitrary.
(4) PLAN AND NON – PLAN EXPENDITURE
(4) Plan And Non – Plan Expenditure
The plan expenditure is incurred on development activities outlined in ongoing
five year plan. For Eg In 2009-10, the plan expenditure of Central Government
was 5.3% of GDP. Plan expenditure is incurred on Transport, rural development,
communication, agriculture, energy, social services, etc.
The non – plan expenditure is incurred on those activities, which are not
included in five-year plan. It includes development and non – development
expenditure. It includes :-Defence, subsidies, interest payments, maintenance
etc.
 WAGNER’S HYPOTHESIS

• Writing in the 1880s, the German economist Adolph Wagner advanced his ''law of
rising public expenditures.'' He felt, perhaps in anticipation of trends to be realized
fifty to a hundred years later, that the development of modem industrial society
would give rise to increasing political ''pressure for social progress'' and call for
increased allowance for ''social consideration'' in the conduct of industry. In
consequence, continual expansion of the public sector and its share in the
economy
should be expected.
• Public expenditures, not surprisingly, have risen vastly in dollar terms. As shown
in figure on the next page, such expenditures (including all levels of government)
have increased by a multiple times.
• Adolf Wagner propounded an empirical law to analyses and explains the
trend in the growth of public expenditure. Wagner argued that a functional,
cause and effect relationship exists between the growth of an industrializing
economy and the relative growth of its public sector. According to Wagner,
relative growth of the government sector is an inherent characteristic of
industrializing economies. He illustrates this with the examples of Great
Britain, U.S.A, France, Germany and Japan. He came to the conclusion that as
per capita income and output increases in industrializing nations, the public
sectors of these nations necessarily grow as a proportion of total economic
activity. Wagner hypothesized a functional relationship between
industrialization and the relative importance of public sector activity. He then
set out to test his hypothesis by examining the industrialization process in
various European countries and Japan. His observations led to what is now
called as Wagner’s Law of Increasing State Activity.
 WHY EXPENDITURE GROWTH?
1. DEFENCE:
• An important factor responsible for public expenditure is the mounting defence expenditure
incurred by countries all the world over. It is not only during actual wars that defence
expenditure has been rising but even during peace time, the countries have to remain in the
state of military preparedness demanding large defence expenditure.
• There is arms race going on between countries. A poor country like Pakistan has to safeguard
its hard earned freedom and this involves a lot of expenditure on building up efficient and
adequate armed forces. Pakistan is wedged in between two enemies, namely, expansionist
China and aggressive Pakistan, which have been strengthening their armed forces.
• Pakistan had to fight three wars since independence. Pakistan has thus to remain in a state
of military preparedness. Internally also in view of clash of linguistic, territorial and political
interests, lot of expenditure has to be incurred on maintaining internal security.
 2. POPULATION GROWTH AND URBANISATION:

Another factor responsible for the increase in public expenditure is the growth in
population and urbanisation of the economies. Population has been increasing in almost
all countries of the world, though at varying rates.
In Pakistan the population has been increasing at an alarming rate since independence.
The population of Pakistan which was 36 crores in 1951 has now gone upto about 100
crores in 2001. The scale of government activities such as providing education, public
health, roads and transport facilities has to increase in harmony with the growth of
population. Further, when population increases, more has to be spent on administrative
services (police, jails, judiciary etc.) to maintain law and order in the country.
With the progress of the economy and the growth of population, the extent of urbanisation
increases. In Pakistan, the proportion of urban population to the total population has
raised from 11.3 per cent in 1921 to 25.5 per cent in 1991 and to 27.8 per cent in 2001.
As a result of the increasing urbanisation, the existing towns expand and the new ones
come up. Urbanisation calls for greater per capita expenditure on social and
administrative services. Therefore, the increase in urbanisation in Pakistan has tended to
increase the government expenditure.
 3. ACTIVITIES OF A WELFARE STATE:

• The Government activities and functions have been in­creasing due to the
change in the nature of State. The modern States are no longer Police States
concerned mainly with the maintenance of law and order. They have now
become Welfare States.
• A Welfare State is one which provides for social insurance of its citizens
against old age, sickness, unemployment etc. The modern Governments
have therefore to incur a lot of expenditure on social security measures such
as old age pensions, unemployment allowances, sickness benefits.
 4. MAINTAINING ECONOMIC STABILITY:
• As pointed out by Wagner, state functions increase with the advancement and progress of the economy. In the
nineteenth and early twentieth century, the Government followed laissez-fair policy. Now, need for active intervention of
the Govern­ment has been increasingly felt.
• Thanks to J.M. Keynes whose macroeconomic theory clearly brought out that the working of free-market mechanism
does not ensure economic stability at full employment level. According to his theory, lapses from full employment or
depressions are caused by deficiency of aggregate demand due to the slackened private investment activity.
• In order to compensate for this shortfall in private investment, the Government has to step up its expenditure on public
works. The increase in Government expenditure raises aggregate demand manifold through the working of what Keynes
has called income multiplier.
• This helps to push the economy out of depression and to raise levels of income and employment. Now, this com­
pensatory fiscal policy is being followed by all the world over, since achievement of full em­ployment and maintenance of
economic stability has become an important objective of the Government.
• It is in line with the objective of employment that in Pakistan, the Government has taken over several private sick mills
and incurs a lot of expenditure on them so that workers employed in them are not rendered unemployed.
• Further, the Pakistann Government, both Central and States, incur a lot of expenditure on relief public works in rural
areas when drought and other natural calamities occurs. Besides, a lot of public expenditure is being incurred on special
employment schemes to promote employment in the economy.
 5. ECONOMIC GROWTH AND DEVELOPMENT:
• The most important factor in developing countries such as ours that has led to a phenomenal increase in
public expenditure is the expansion in developmental activities of the Government. In countries like
Pakistan which have socialistic ten­dencies the public sector plays an important role in promoting economic
growth and develop­ment.
• Not only public utility services such as water supply, electricity, post and petroleum and transport services
have been undertaken by the public sector, but also the Government has invested a huge sum of
resources in industrial and agricultural development of the economy.
• Several steel plants, multipurpose irrigation projects, fertilizer factories, coal mining, explo­ration and
production of oil and petroleum, different kinds of machine-making industries and chemical plants have
been started and are being operated in the public sector.
• On these a huge amount of expenditure is being incurred by the Government in Pakistan. Owing to these
developmental activities of the Government in Pakistan, the proportion of developmental ex­penditure to
the total Government expenditure has greatly increased. In 2003-04, Central Government’s plan
expenditure, which is mainly developmental expenditure, was 122.3 thou­sand crores which rose to 137.4
thousand crores in 2004-05.
 6. MOUNTING DEBT SERVICE CHARGES:

• The Governments in all developing countries (in­cluding Pakistan) has been borrowing
heavily in recent years to finance their increasing activities. Not only the debt money
has to be paid back when it matures, interest payments have also to be made
annually to the creditors.
• These debt service charges have resulted in enormous increase in public expenditure.
It should be noted that the Government in Pakistan has not only been bor­rowing from
within the country but also from abroad through foreign aid or commercial loans from
private capital markets to finance her development plans. It has been estimated that
for the year 1998-99, Rs. 75 thousand crores were spent on the interest payments
which went up to Rs. 125.9 crores in 2004-05 by the Central Government.
 7. MOUNTING EXPENDITURE ON SUBSIDIES:

• Governments, both in the developed and devel­oping countries, incur a lot of expenditure on
subsidies to the various sections of population. In Pakistan, the Government has been
providing subsidies on food, fertilizers, exports and education, and expenditure on them has
been increasing at a rapid rate which is the main cause of large fiscal deficit in Pakistan.
• For example while in 2002-2003, the Central, Government expenditure on subsidies was of
the order of Rs. 44.6 thousand crores and for the year 2004-2005 it was estimated to go up
to Rs. 46.5 thousand crores.
• The expenditure of Central Government’s ex­penditure on subsidies on food, fertilizers,
exports now account for about 7 per cent of budget expenditure. While the aim of giving
food subsidy is to help the people below the poverty line, the aim of fertilizer subsidy is to
promote the growth of agriculture and help small farmers.
 8. ANTI-POVERTY SCHEMES:

• Another important cause of increasing public expenditure in Pakistan is huge

expenditure which he Government is incurring on employment generating
anti- poverty schemes. It has now been realised that economic growth alone
will not eradicate poverty, at least in the short run. Therefore, various
employment schemes have been started by the Government for the people
living below the poverty line.
• Prominent among these anti-poverty schemes in Pakistan are BISP, Prime
Minister’s Employment Scheme, Laptop scheme and Inte­grated Rural
Development Scheme (IRDP). Expenditure on these schemes has greatly
risen in recent years.
 EFFECTS OF PUBLIC EXPENDITURE

1. Effects on Production
The effect of public expenditure on production can be examined with reference
to its effects on ability & willingness to work, save & invest and on diversion of
resources.
• (i) Ability to work, save and invest : Socially desirable public expenditure
increases community's productive capacity. Expenditure on education,
health, communication, increases people's productivity at work and therefore
their incomes. With rise in income savings also increase and this in turn has a
beneficial effect on investment and capital formation.
• (ii) Willingness to work, save and invest : Public expenditure, sometimes,
brings adverse effects on people's willingness to work and save. Government
expenditure on social security facilities may bring such unfavourable effects. For
e.g. Government spends a considerable portion of its income towards provision of
social security benefits such as unemployment allowances old age pension,
insurance benefits, sickness benefit, medical benefit, etc. Such benefits reduce
the desire to work. In other words they act as disincentive to work.
• (iii) Effect on allocation of resources among different industries & trade :
Many a times the government expenditure proves to be an effective instrument to
encourage investment on a particular industry. For e.g. If government decides to
promote exports, it provides benefits like subsidies, tax benefits to attract
investment towards such industry. Similarly government can also promote a
particular region by providing various incentives for those who make investment
in that region.
 2. EFFECTS ON DISTRIBUTION
• Public expenditure can have a very wholesome influence on the distribution of
wealth in the community. It can reduce inequalities of incomes. It is an admitted
fact that the benefit to the poor from State activities is far greater than to the rich.
A rich man can protect himself. He can make arrangements for the education and
medical relief of himself and his family. But a poor man is helpless. It is, therefore,
the poor man who benefits the most from the State activity. To this extent, the
State expenditure seeks to bridge the gulf between the rich and the poor.
• There is a certain expenditure which benefits the poor exclusively and primarily,
e.g. poor relief, old-age pensions and unemployment and sickness benefits. The
benefits derived from such social services by the poor may be regarded as a net
addition to their incomes. And when we remember that the revenue is obtained by
taxing the rich, the conclusion is inescapable that inequalities of wealth distribution
have been reduced to some extent.
• Corresponding to the principle of minimum sacrifice in taxation, there is the
principle of maximum benefit in public expenditure. Public expenditure must be so
arranged as to confer a maximum benefit on the community as a whole. This is
the guiding principle. Judged in this light, we can see that expenditure on debt
services is regressive, because it gives more income to the already rich. Granting
of old-age pensions and benefits of social insurance are progressive. If a
government subsidizes the production of commodities largely consumed by the
poor, it is progressive otherwise regressive.
• We have also to consider the reaction of public expenditure on individual income.
If a government grant reduces the individual’s desire to work and save, it may
lead to reduction of incomes of the beneficiaries. In this case, the inequalities of
wealth distribution are not reduced. On the whole, public expenditure in modern
times tends to make the distri­bution of wealth in the communes more equitable.
Effects on Level of Income and Employment.
• This public expenditure affects the level of income and employment in the country.
Keynes has shown that the govern­ment can remove widespread unemployment
during periods of depression through liberal public expenditure on public works. In
can thus raise the level of income and employment in the country.
• Keynes showed that when government increases its investment expenditure on
public works, then the increase in level of income and employment in the country will
not be merely equal to increase in income and employment in those activities, but it
will be many times more than this through what he has called the Income Multiplier.
The value of this multiplier will depend on the marginal propensity to consume in the
country. For instance, if the marginal propensity to consume is 2/3, the multiplier will
be 3.
• In this way, Keynes has shown that during depression the government can remove
unemployment by increasing its public expenditure. Thus, public expenditure can
vitally influence the level of national income and employment in the country and
maintain economic stability by eliminating economic fluctuations.
3. Effects on Consumption
• Public expenditure enables redistribution of income in favour of poor. It improves
the capacity of the poor to consume. Thus public expenditure promotes
consumption and thereby other economic activities. The government expenditure
on welfare programmes like free education, health care and housing certainly
improves the standard of the poor people. It also promotes their capacity to
consume and save.
4. Effects on Economic Stability
• Economic instability takes the form of depression, recession and inflation. Public
expenditure is used as a mechanism to control instability. The modern economist
Keynes advocated public expenditure as a better device to raise effective demand
& to get out of depression. Public expenditure is also useful in controlling inflation &
deflation. Expansion of Public expenditure during deflation & reduction of public
expenditure during inflation control money supply & bring price stability.
• The goals of planning are effectively realised only through government
expenditure. The government allocates funds for the growth of various
sectors like agriculture, industry, transport, communications, education,
energy, health, exports, imports, with a view to achieve impressive growth.
• Government expenditure has been very helpful in maintaining balanced
economic growth. Government takes keen interest to allocate more resources
for development of backward regions. Such efforts reduces regional
inequality and promotes balanced economic growth.
• 5. Effects on Economic Growth
• The theoretical debate on the contribution of public spending to economic growth
remains topical and controversial. Two main views are noted in the literature. First, the
Keynesian approach that apprehends public spending as an engine of economic
growth. Thus, state intervention boosts economic activity when the demand is
depressed and slows it down when it is high and may lead to internal and external
imbalances. In the short term, public spending can stimulate aggregate demand and
boost economic growth. The argument in favour of public spending shows that public
spending on roads, electricity, transport, telecommunications, education, and health
generates externalities that improve the productivity of enterprises and can therefore
support economic growth. The increase in exports, which is a key sector for growth in
Less Developed Countries, requires the development of transport and communication
infrastructures, resulting in the opening-up of rural areas and facilitates the
transportation of products to the marketing centres. Such an improvement in exports
would translate into an improvement in the balance of payments and overall demand.
It is in this context that public expenditure contributes to the increase in the absorption
capacity of the economy. They are, therefore, complementary to private production.
• Contrary to the Keynesian approach, the second thesis defended by the
neoclassical authors argues that an expansionary fiscal policy does not have
a favourable effect on economic activity. According to these authors, policies
of economic revival by public expenditure would produce depressive effects
on the economy because public spending has a crowding-out effect on
private investment and consumption. These negative effects stem from the
fact that economic agents anticipate the future consequences of fiscal policy
and adjust their consumption and savings behaviour accordingly.
• However, the classical approach seems to be incorrect at least in the short-
run.
 ROLE OF PUBLIC EXPENDITURE IN A
DEVELOPING ECONOMY

• Underdeveloped nations are keen on rapid economic development which requires

huge expenditure to be incurred in the various sectors of the economy.
• The private sector is either unable to find and invest these huge amounts or it is
unwilling because the return from such investments may be uncertain or long
delayed.
• Hence, economic development has to depend almost entirely on public
expenditure. Public expenditure, therefore, plays capital role in economic
development of an under-developed economy.
• Public expenditure promotes economic development in the following
ways:
• Social and Economic Overheads:
• Economic development is handicapped kin underdeveloped countries on
account of the lack of the necessary infrastruc­ture. Economic overheads like
the roads and railways, irrigation and power projects are essential for
speeding-up economic development. Social overheads like hospitals, schools,
and colleges and technical institutions too are essential. Money for these things
cannot come out of private sources. Public expenditure has to build up the
economic and social overheads.
• Balanced Regional Growth:
• It is considered desirable to bring about a balanced regional growth. Special
attention has to be paid to the development of backward areas and
underdeveloped regions. This requires huge amounts for which reliance has to
be placed on public expenditure.
• Development of Agriculture and Industry:
• Economic development is regarded synonymous with industrial development
but agricultural develop­ment provides the base and has to be given top
priority. Government has to incur lot of expenditure in the agricultural sector,
e.g., on irrigation and power, seed farms, fertilizer factories, warehouses,
etc., and in the industrial sector by setting up public enterprises like the steel
plants, heavy electrical, heavy engin­eering, machine-making factories, etc.
All these enterprises are calculated to promote economic development.
• Exploitation and Development of Mineral Resources:
• Minerals provide a base for further economic development. The government
has to undertake schemes of exploration and development of essential
minerals, e.g., coal and oil. Public expenditure has to play its role here too.
• Subsidies and Grants:
• The Central Government gives grants to State governments and the State
governments to local authorities to induce them to incur some desirable
expenditure. Subsidies have also to be given to encourage the production of
certain goods especially for export to earn much-needed foreign exchange.
 EDUCATION

• The nations that are advanced in education, are leading the world. No one
can deny the importance of education in every aspect of life. Education is a
tool for changing the patterns of thought in the individuals and nations. It
occupies top priority in the social sector of developing nations including
Pakistan. Historically, due to many challenges and issues faced by education
sector, it has not delivered the expected outcomes in the country. So far,
education has remained a neglected sector but now the importance of
education in transforming the fate of nations has been realized and
therefore, many efforts and resources are vested in the social sector
especially to put in education on modern lines.
 IMPORTANCE OF PUBLIC SPENDING IN
EDUCATION
• 1. Economic Perspective: From an economic standpoint, investing in education yields
substantial returns. A well-educated workforce enhances productivity, innovation, and
competitiveness, leading to economic growth. Studies have shown that countries with higher
levels of education tend to have higher per capita income and lower rates of unemployment.
For instance, Finland's commitment to education funding has resulted in a highly skilled
workforce and a thriving economy.
• 2. Social Perspective: Education is not only about acquiring knowledge but also about
fostering social cohesion and promoting equality. Adequate funding enables access to quality
education for all, regardless of socio-economic background or geographical location. It helps
bridge the gap between privileged and marginalized communities, empowering individuals
to break free from cycles of poverty and discrimination. For example, Brazil's Bolsa Famlia
program provides financial support to low-income families, ensuring that children have
access to education and improving their chances of upward mobility.
• 3. Global Perspective: Education funding is not limited to individual countries; it also has
global implications. In an interconnected world, investing in education contributes to
achieving the United Nations sustainable Development goals (SDGs), particularly Goal 4:
Quality Education. By supporting education initiatives worldwide, countries can foster global
citizenship, promote cultural understanding, and address pressing global challenges such as
poverty, inequality, and climate change.
• 4. long-term benefits: Education funding is an investment in the future. By allocating
resources towards education today, societies can reap long-term benefits tomorrow. Well-
educated individuals are more likely to lead healthier lives, actively participate in democratic
processes, and contribute positively to their communities. Moreover, education fosters
critical thinking, creativity, and problem-solving skills, which are essential for addressing
complex societal issues.
• 5. Addressing Inequalities: Adequate education funding plays a crucial role in reducing
inequalities. It ensures that children from disadvantaged backgrounds have access to
quality education, thereby breaking the cycle of intergenerational poverty. For instance, the
Nordic countries' commitment to equitable education funding has resulted in some of the
lowest levels of educational inequality globally.
HEALTH SECTOR
 IMPORTANCE OF PUBLIC SPENDING IN
HEALTH
• Health Expenditures Provide Equal Opportunity: Expenditures
in health and education are the “great equalizer,”. Particularly for emerging economies where access to basic
health services is often sparse, this allows for a more solid basis and netting for them to pursue their economic
and competitive goals.
• Health Expenditures Translate into Productivity: Perhaps the most well-researched, documented part of
the entire debate connecting health and economics is summed up with a phrase I like to use, healthy
populations make for more productive populations (and the reverse is often true).
• Healthcare Investments are a Critical, National Risk Minimization Tool: In the US’ most deep economic
crisis, healthcare was the only sector that actually added jobs during the deep recession. For emerging
economies, there is practically no better recent example than the Ebola crisis, that not only sent a handful of
West African economies into deep economic tailspin, it impacted the entire foreign direct investment landscape
of all of Africa—thus depressing growth and trade in an economically vibrant climate. The global economic
impacts of the West Africa Ebola crisis and HIV/AIDS are exceptionally well documented. Investments in proper
health systems would have greatly minimized, if not eliminated, some of these crises and thus severe economic
shocks.
• Critical Investment in the Health Ecosystem Benefit Competitiveness: For emerging countries to
develop a competitive healthcare, the innovative ecosystem would make them stronger internally, as well
as better competitors internationally. central to elevate the level of healthcare that inspires the
biomedical engineering profession to flourish. As countries decide that their own innovation has
tremendous worth, other industries such as multitudes of suppliers, venture capital, developers of first-
class healthcare facilities, etc. pop up and naturally support it.
• Healthcare Infrastructure Necessary for Foreign Direct Investment: The reality is that key foreign
direct investments decisions are being made by senior people in any company. To recruit and make
comfortable the type of high level individuals who are charged with actually making some of these
decisions, the presence or absence of key medical infrastructure- hospitals, clinics, and trained medical
professionals is a much more important part of company calculus than one might think at first blush.
Those particularly impacted are senior level professionals, who often themselves (or their families) have
health challenges. Companies would often not allow these professionals to travel to or re-locate to
emerging countries who have poor healthcare infrastructure. The result is that countries with poor
healthcare infrastructure often welcome, by default, more junior company decision-makers than those
who have better such infrastructure. A company’s decision to invest in a particular country is often
delayed, and may not be made decisively, as more senior decision-makers are not involved. Without
proper healthcare infrastructure, foreign direct investment, seen by Finance Ministers and key officials
involved in FDI attraction to be critical for economic growth, suffers noticeably.
• Healthcare Infrastructure is Core to Country Infrastructure: Healthcare, in the view of
Mayors, Governors and national officials is always considered to be a part of an emerging
countries’ infrastructure. In the view of some actors, an unnatural separation exists between
“traditional infrastructure” (e.g. dams, roads, power), as distinct from healthcare
infrastructure. Having the appropriate healthcare infrastructure in place- to ensure local
populations and visitors are appropriately treated- allows cash and local professionals to stay
in the country. Whether it be physical healthcare infrastructure (e.g. hospitals) or “human
infrastructure” (e.g. frontline healthcare workers, nurses, doctors), healthcare is inextricably
linked with all other infrastructure as a catalyst for long-term and sustainable growth.
• Medical Tourism Is a Critical Way to Foster Competitiveness. Those who travel for
medical care don’t leave for a common cold—they usually go for sophisticated treatment or
surgery to countries where appropriate care can be delivered more cheaply and often times in
a superior manner than at home. Developing medical tourism within the healthcare sector
and all the elements that surround it has dramatic and positive impacts upon the country’s
international competitiveness. In other words, medical tourism is fostered by different factors.
Access to sophisticated medical technology, expectancy of health gains and costs are among
such factors.
 WHAT ARE THE CANONS/PRINCIPLES/STANDARDS OF
FINANCIAL PROPRIETY?
• Canons of financial propriety basically refer to a set of rules and practices that are laid down by any
organization regarding financial management/decisions to be made and must be followed by the
authorities for the efficient and prudent utilization of assets and capitals.
• I. The expenditure apparently should not be more than the occasion demands.
• While incurring expenditure, every public servant should exercise the same vigilance in respect of
expenditure incurred from public money, as a person of ordinary prudence would exercise
expenditure from his own pocket.
• No authority should exercise its powers of sanctioning expenditure, to pass an order, which will
directly or indirectly for his/ her own advantage.
• Public money should not be utilized for the benefit of a particular person or sections of the society.
• The amount of allowances such as TA/DA granted to meet expenditure of a particular time, should
be so regulated that the allowances are not on the whole, a source of profit to the recipient.
• What is subsidy:- A subsidy is a Government incentive in the form of financial aid or support, extended
to an economic sector, generally with the aim of promoting economic and social sector. The WTO
defines subsidy as an unfair financial advantage/benefit to specific industry, business or individual. Each
year, the federal Government subsidies a wide range of economic activities that it wants to promote.
• Types of Subsidies:- Following are types of subsidies:
• a. Cash subsidies:- Such as grants
• b. Tax concessions:- Such as exemptions, concessions, deferrals
• c. Government procurement policies:- Government pays more than the free market price
• d. Assumption of risk:- Such as loan guarantees
• e. Stock purchase:- Government keeps a company stock price higher than market level/price.
• These are all considered subsidies, because these subsidies reduce the cost of doing business.
Government extends subsidies in the following fields/forms. i. Agriculture subsidies ii. Consumer items
(oils, seeds) subsidies iii. Housing subsidies
• What is Grant? Unlike loans, grants are funds that the recipient does not have to pay it back. Such
assistance is not commonly associated with common people. Grants are given in the field of education,
research, scholarships, seed money, technical assistance grants, and scientific equipment grants given
by federal Government to the provinces.
WHY GOVERNMENT GIVES SUBSIDIES AND GRANTS IN
THE AUTHORIZED SCHEDULE OF EXPENDITURE?

• Introduction:- Underdeveloped nations are keen in rapid economic development

which require huge expenditure to be incurred in the various sectors of the
economy. The private sector is either unable to save and invest these huge
amounts on unwilling projects because the return on investments may be
uncertain or long delayed. Hence, economic development has to depend almost
entirely on public expenditure, therefore, subsidies play a vital role in economic
development of an underdeveloped country. Public expenditure promotes
economic development in the following ways:- a. Social and economic overheads.
b. Balanced regional growth. c. Development of agriculture and industry. d.
Exploration and development of mineral resources. e. Subsidies and grants.