PUBLIC EXPENDITURE AND ECONOMIC GROWTH
WHAT IS PUBLIC EXPENDITURE?
MEANING:
Public expenditure refers to Government expenditure i.e. Government spending. It is incurred by Central, State and Local governments of a country.
Spending by government , municipality, or any local authority. It covers things such as health, education or social services and is funded by tax revenue. It is one of the element that make up aggregate expenditure.
Government spending or government expenditure is classified by economists into three main types. Government acquisition of goods and services for current use to directly satisfy individual or collective needs of the members of the community is classed as government final consumption expenditure.
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Output is generally measured in terms of GNP.
THEORIES RELATED TO PUBLIC EXPENDITURE AND ECONOMIC GROWTH
Adam Smith wrote in the 'Wealth of Nations' that the government should restrict their activities to;
1. Defense against foreign aggression.
2. Maintenance of internal peace and order.
3. Public development work.
All other functions besides these were considered beyond the scope of the state & expenditure on them was treated as unjust & wasteful.
But there had been a spectacular expansion in the functions of state & this resulted in phenomenal increase in public expenditure for this we shall take a look at contribution by Adolph Wagner & Peacock-Wiseman hypothesis.
Adolph Wagner's Law of Increasing State Activity
Adolph Wagner, the German economist made an in depth study relating to rise in government expenditure in the late 19thcentury. Based on his study, he propounded a law called "The Law of Increasing State Activity".
Wagner’s law states that "as the economy develops over time, the activities and functions of the government increase".
According to Adolph Wagner, "Comprehensive comparisons of different countries and different times show that among progressive peoples (societies), with which alone we are concerned; an increase regularly takes place in the activity of both the Central Government and Local Governments constantly undertake new functions while they perform both old and new functions more efficiently and more
Deficit spending refers to government spending that exceeds federal income and taxes over a period of time. The government can increase borrowing to obtain money from taxes or from foreign governments. The money that is borrowed is then put back into the economy through government spending. While deficit spending will increase government debt, it is believed to stimulate the economy to end a recession. Deficit spending has several advantages and disadvantages to government borrowing.
To begin with , budgeting in the public setting clearly have political implications ,as Rubin discussed in her writings “ The politics of public budgeting”. In the government’s effort to build an audacious spy satellite , the government surpassed it’s budget limit for a failed attempt on the creation of “F.I.A.” During this time the C.I.A and the government was in a rush to build this brand new spy program in order to spy on the soviet union. Although , after a while congress realized there were no progress in building the spy program and wanted to shut it down others in the political setting continuously paid for the project to keep it going. According to Phillip Taubman “ It took two more years, several more review panels , and billions more dollars before the government finally killed this project.”
If the US economy were experiencing a market failure like under provision of public transport or education, the government would be advised to increase expenditure on these areas. In the end, this may lead to a rise in productivity, which in future, it will cause a high economic growth rate and increased tax revenues. Nevertheless, government spending does not necessarily cause a rise in productivity. The US government has promised to increase expenditure on NHS that is expected to orchestrate a rise in the economy. However, this sort of extended spending is uncertain to increase the rate of economic growth (Boyes & Melvin, 2008).
Government spending looks at the different areas the government spend money such as infrastructure (busways, trains, bridges). These decisions are made by the government and so paid for by the consumer. Government spending can be seen in China with the 1,200 square kilometre Liangjiang region in western China expected to become one of the nation's most significant development zones (Ryan, Wyatt (October 3, 2010). Imports and Exports are the commodities in which a country brings into a country (Import) and those domestic commodities that are sold to other countries (Export). Both economic drivers are crucial when increasing GDP due to their ability to strengthen the value of a countries commodity.
The National health expenditures is defined as any funds spent on and for healthcare services. Healthcare funding consists of individual, public, and
Public expenditure - Spending made by the government of a country on collective needs and wants such as pension, provision, infrastructure, etc.
The three biggest sources of government spending are Health, Social Security, and Defense (The Concord Coalition 2015).
The government solely protects the rights of the employees and consumers and offer of public goods. Government spending and expenditure are one way by which the government control market economies, with increased spending to increase cash flow in the economy, and increased expenditures to minimize cash flow in the economy. Such increases
The federal budget deficit it is an excess government spending on state revenues. And public debt is an aggregate amount of government debt, which is composed of outstanding loans and unpaid interest thereon. U.S. federal expenditures is approximately around 3.5-4 trillion dollars, which includes: defense – $700b, social security – $700b, Medicare and Medicaid – $450b, Interest – $200b, other assistance such as food stamps, unemployment, housing, EITC - $180b, and other non-defense - $600b.
Governments are funded in one of two ways, through taxation and loans. The government has the ability to borrow large amounts of money. It is advantageous since the government can react quickly by borrowing through the use of treasury notes and bonds when there is not enough private sector spending. They may sometimes step in to boost the economy. This spending can infuse much needed cash into the economy to avert some of the repercussions of a depression. It is here that the government must be very cautious in how and where the money is spent, since all spending will not necessarily lead to a positive or profitable income in the future. Another way to boost the economy is through funds that are invested in businesses and programs that spark economic activity such as job creation, which creates wages, which improve the standard of living, generate
In the United States, governments at the state and local levels are relying heavily on intergovernmental aid. Intergovernmental aid is fiscal aid that originates from another governmental unit in the form of revenue and grants. It can be reimbursements for general governmental functions or for specific services or projects. This means that aid in the US is flowing from the federal government to either state or local governments and from state governments to local governments. Aid from federal and state governments can come in several different forms such as direct aid that is awarded annually or through applied grants. Typically, states will apply for federal grants and then will distribute the funds to local governments. At the same time, local governments have the ability to apply for federal and state grants.
Aggregate spending refers to consumer purchases, business and housing investment, government purchases of goods and services and exports net of imports . This is the second way to add up GDP. The Federal Reserve uses monetary policy to stimulate aggregate demand by expanding money supply and lowering interest rates, which increases households and firms’ desired spending. Expansionary fiscal policy uses changes in taxes and government spending to affect overall spending.
After various changes to the economic tax and interest rate, CPHP have conducted and compiled research into current public spending. The results show that there has been a dramatic reduction in the level of public spending in the UK.
The Development of a country to a large extent depends on how the bureaucracy of that country functions. As bureaucracy gives input in policy making, implements those and evaluate outcome of an implemented policy,
The positive side describes the activities of the public sector, explains the reasons of the programs in existence and also analyses the consequences of government policies