Public Expenditure: Meaning, Classification and Effects

After reading this article you will learn about:- 1. Meaning and Scope of Public Expen­diture 2. Classification of Public Expenditure 3. Effects.

Meaning and Scope of Public Expen­diture:

Till the middle of the nineteenth century, the writers of Public Fi­nance gave comparatively little attention to the subject of public expenditure. In earlier days, the growth of public expenditure was more or less slow and it did not, therefore evoke any meaningful and deep study. However in reality it is more appropriate to study the theory of public expenditure, before that of public revenue or taxa­tion.

Justifying this Mrs. Hicks states it is more logical to start with public expenditure. It the state commits to perform any activity it must incur some expenditure. Hence the need for expenditure comes first and this in turn gives rise to the need to raise revenue.

However the theory of public expenditure was not given due weightage in the treatment of the subject matter of public finance. As Le-well Haris says “the economists have generally concentrated their attention on the theory of taxation.

The theory of public expenditure has been more or less confined to that of generalities in terms of the effects of public expenditure on employment and price level. In-spite of the fact that public expenditure has increased rapidly during the last two centuries, in almost every state the area of public expenditure re­mains relatively unexplored”.

Further the level of public expenditure depends on government programmes, which are the outcome of po­litical decisions. Gerhard Colm points out, “the determination of gov­ernment programmes is a political procedure and as such is carried on in a milieu, usually called ‘Politics’ which includes vote gathering, pressure by lobbies, log rolling and competition among political ri­vals”.

This also contributed towards a neglect of the study of the theories of public expenditure for a long time. Public expenditure refers to the expenses which the govern­ment incurs for its own maintenance as also for the economy as a whole.

It means the expenses of the public authorities – central, state and local governments – either in protecting the citizens or in promoting their social and economic welfare. The volume of public expenditure has been growing in all countries because of the con­tinuous increase in the activities of the state and other public bod­ies.

Hence the study of public expenditure, its causes principles and effects is very important, from the point of view of the subject matter of public finance.

In this context Bastable, a well-known writer of the 19^th century remarked that “the rapid development of financial study in recent years has led to a careful examination of the more backward divisions of the subject in-order to bring them into scientific form. The theory of state expenditure has naturally attracted a large part of this fresh energy”.

Historically there are two divergent views, regarding the scope of public expenditure. That is the traditional and the modern. Earlier writers attached to the classical school, were opposed to increasing public expenditure for two main reasons.

The first was the belief of Adam Smith and his followers that the functions of the state should be restricted to justice, police and arms. The second was the belief that government expenditure is wasteful and that money can be better utilized by private persons than by government. This view arose out of the mistaken notion of the classists about the nature of the state.

Adam Smith considered state as a necessary evil’ and he propagated the concept of ‘police state’, in which the duties of the sovereign were confined to defence, protection of the society from invasions and administration of justice and maintenance of economic institutions.

In this context Adam Smith observed “that state is the best which governs the least”. He also considered all public expen­diture as unproductive and private expenditure as productive.

Justify­ing this, J.B. Say observed “the very best of all plan of finance is to spend little”. Hence the classical economists never fully appreciated the importance and advantages of public expenditure.

They always stood for minimum taxation and minimum expenditure. Ricardo stated “if you want a peaceful government you must reduce the budget”. Hence Dalton observed “credulous minds are thus biased in advance against all forms of public expenditure”.

However the classical view on the nature of public expenditure is quite unscientific. At the same time we would not start from the posi­tive assertion that all public expenditure is good.

The genuine eco­nomic test of the productiveness of any expenditure is its produc­tiveness of economic welfare. The worldwide depression of Nine­teen thirty’s and the global war made a rethinking in the nature of state activity and the need and necessity for increased public spend­ing.

Modern economists argued for increased intervention of state in economic activities of nations, due to the spread of socialist ideas and peoples’ democracy. Thus public expenditure has acquired great importance in modern times for two basic reasons.

Firstly the eco­nomic activities of the state have increased in many ways and sec­ondly it has now been realized that the nature and volume of public expenditure can have important effects on the economic life of the country on production, distribution and the general level of eco­nomic activity. Modern economists believe in the often quoted re­mark that “now a day we are all socialists”.

Hence it is only after the great depression of 1930’s and the feverish activities during war and post war period, that increased attention was paid to the study of public expenditure. This change in attitude was facilitated by the writings of Adolf Wagner, a German economist, through his famous law of increasing state activities.

Further, Prof. R.A. Musgrave, a well-known twentieth century economist advocated and brought out significance of public household. Today the study of public finance is not complete without a proper discussion on public expenditure.

Classification of Public Expenditure:

It is conventional in every text book of public finance to classify public expenditure into various economic categories. Classification of public expenditure refers to the systematic arrangement of differ­ent items of state expenditure, on some specified economic basis.

Classification is always done on some logical and rational economic basis. Classification of public expenditure is important to understand the nature and effect of public expenditure. Through this classifica­tion, the state executive maintains an effective control over public expenditure and prevented public funds leakages and wastages, di­versions and misappropriations.

Classification of public expenditure is good for auditing and public funds can be better safeguarded against misappropriation. Classification of public expenditure helps us to understand the relative importance of each heads of expenditure at different times.

According to Prof. Shirras, the test of public expenditure is not the aggregate expenditure but it is the relative amounts which are as­signed to different heads from time to time. Hence classification of public expenditure is important for clear understanding of the nature and effects of public expenditure.

Economists have proposed various methods of classifying pub­lic expenditure. However, the methods differ widely from one an­other. This is because; there is little agreement between authorities of public finance regarding the best way of arranging the various kinds of state outlays.

Hence a completely satisfactory method is yet to emerge. Hence Mill, Roscher, Plehn, Nicholson and Bastable have their own methods. In this context Shulz observes “nineteenth century fiscal writers devoted considerable space to the subject of the proper classification of government expenditure, but no two even agreed upon the same classification”.

The following are the impor­tant classification of public expenditure made by different writers:

1. Benefit Criteria:

A common classification of public expenditure adopted by the 19^th century writers is based on the principle of Benefit Conferred. Such as the division adopted by Cohn and Plehn.

They divided public ex­penditure under the following four heads:

(a) Firstly, expenditure which confers common benefit on all citi­zens or taxpayers, example: defence, universal education given to the residents free of charge etc.

(b) Secondly, expenditure conferring special benefit on some per­sons or on certain classes, example; expenditure on poor relief.

(c) Thirdly, that class of public expenditure which confers a special benefits on certain people and at the same time a common ben­efit on all the others, e.g., the administration of justice.

(d) Fourthly, those items of expenditure which confer a special ben­efit only on some individuals; e.g., certain industries specially favored by the state (granting subsidy).

An obvious objection to this classification is that all public ex­penditure is for the common and public interest.

It is very difficult to draw distinction between special benefit and common benefit con­ferred. Satisfaction of special benefit may lead to generation of com­mon benefit. For example, expenditure on poor relief, which is specifically for the benefit of those immediately concerned, result in common benefit such as prevention of crime, satisfaction of general sense of justice etc.

As Nicholson rightly observed “public expen­diture which does not confer some common benefit or answer some public purpose ought not to exist in a modern state”, Hence Nicholson attempted to give a more scientific classification of expenditure.

2. Revenue Criteria:

F.S. Nicholson classified public expenditure according to the amount of revenue the state realizes in return for the services which it per­forms through public expenditure.

He gives the following four classes of public expenditure:

(a) Firstly expenditure without any direct return of revenue, example poor relief and also the losses sustained in war.

(b) Secondly, expenditure without any direct return of revenue, but indirectly beneficial to revenue. For example free education. Better educated persons are better tax payers and less expensive citi­zen than paupers and criminals.

(c) Thirdly, expenditure with partial direct return of revenue, example education for which fees are charged.

(d) Fourthly expenditure with full return of revenue or even profit. For example investment in public undertakings, railways, post and telegraph etc.

This classification is also subject to criticism. This classifica­tion is overlapping. Separation between the items is not clearly marked. This classification failed to bring out the essential differ­ences in kind between the several forms of expenditure.

For ex­ample, defence and poor relief falls under the first category, however they also confer indirect benefit to revenue. By ensuring peace and tranquility defence ensures the smooth growth of productive activity and national income. This in turn will benefit public revenue consid­erably.

3. Functional Criteria:

Another classification of public expenditure is proposed by H.C. Adams. Functional classification is based on a classification of the various functions actually performed by public authorities.

Adams classifies expenditure under three main functions of government:

(i) Protective Functions:

This includes expenditure on defence, police, judiciary, social disease, prisons etc.

(ii) Commercial Functions:

In this category include expenditure which helps the development of commerce and trade. Services sold to the citizens for a price (e.g., Post office, Railway, Insur­ance), subsidies and bounties granted etc., are examples of com­mercial functions

(iii) Developmental Functions:

In this category include expendi­ture that helps to develop the resources of the country. Expendi­ture under this category includes expenditure on education, pro­vision of public recreation, public works, public health etc.

This division is not free from imperfections. There is no clear cut dividing line between institutions maintaining law and order and those that promote progress. Expenditure incurred for protection is also capable of promoting development Prof. Adams states that with the progress of society, the protective expenditure trend to decline. But this preposition is not supported by historical facts.

4. J.S. Mills Classification:

J.S. Mill based his division on the wants of the state, which in turn is determined by the functions of the state.

He divides expenditure between obligatory or necessary and optional. This classification takes into account the nature of expenditure. Expenditure incurred on defence, justice and maintenance of economic institutions is obligatory.

Owing to past contracts and other legal commitments, coupled with the concept of sovereignty, the state is not free to de­cide whether to incur this type of expenditure or not. It is mandatory on the part of the government to incur obligatory expenditure. Whereas expenditure on social security measures is optional.

The state can postpone or incur this type of expenditure depending upon the availability of resources. It is not compulsory in nature. It can, if time warrants can be postponed to a future date.

5. Shirra’s Classification:

Prof. Findlay Shirras classified public expenditure into (a) Primary expenditure and (b) Secondary expenditure. Primary expenditure includes all those expenditures which governments are obliged to undertake, it is mandatory on the part of the government to incur these expenditure.

It includes expenditure on defence, maintenance of law and order, civil administration, payment of debt etc. These types of expenditures are essential for the existence of the state. All other expenditures, other than those under the category of primary expenditure are grouped into secondary expenditure.

It includes ex­penditure on education, public health, poor relief, unemployment re­lief and other expenses on social security measures.

6. Roscher’s Classification:

Prof. Roscher classified public expenditure into three groups namely:

(a) Necessary,

(b) Useful, and

(c) Superfluous.

Necessary expendi­ture is that which the state has to incur and which cannot be post­poned to a future date. Best example is expenditure on administra­tion. Useful expenditure is that which is desired, but can be post­poned.

Superfluous expenditure is that which the state may or may not occur. It is otherwise called ornamental expenditure.

7. Dalton’s Classification:

Instead of following some strictly logical methods Prof. Dalton give a practical or empirical classification. According to Dalton a broad distinction may be drawn between public expenditure designed on the one hand to preserve the social life of the community against violent attack whether external or internal and on the other, to im­prove the quality of the social life.

In other words, the object of public expenditure may be either to keep social life secure and ordered or to make that secure and ordered life better worth living whether from an economic or non-economic point of view. Hence Prof. Dalton clas­sifies public expenditure into two categories – grants and purchase price.

When the state incurs expenditure and does not get any commodity or service in return, the expenditure is classified as a grant. For example, expenditure on poor relief, payments of old age social insurance etc. are grants. When the state acquires or gets some commodity or service in return the expenditure is a purchase price.

For example, the salaries of government employees, the price paid for purchasing a typewriter etc., are purchase price. To quote Dalton, “payments by a public authority to any of its employees by way of salaries and wages or to contractors whom it employs, are pur­chase prices. On the other hand payments of old age social insur­ance are grants”.

Dalton says that some public expenditure may be partly a purchase price and partly a grant. This is so when the state pays a price higher than what a private buyer would pay. The differ­ence between the two is the element of grant in a purchase price.

Dalton thinks that interest on public debts and pensions are grants if looked at from the point of view of the present, as in the present the state secure no commodity or service by incurring this expenditure.

However, if this expenditure is looked at from a longer point of view then the state pays interest in return for the loans that is secured in an earlier period. Similarly pensions are a payment for service ren­dered in the past.

Dalton also made a distinction between direct and indirect grants. Direct grants are those whose benefits accrue to the persons who secure the grants for example, poor relief. On the other hand indirect grants are those where part of the benefit accrues to a person other than recipient of the grant, for example, subsidies. Part of the sub­sidy may be passed on to the purchaser of the commodity in the form of lower prices.

8. A.C. Pigou’s Classification:

Pigou has classified public expenditure into transfer and non-transfer public expenditure. Pigou in the revised edition of his book on public finance emphasizes the distinction between Transfer Expen­diture which merely redistribute the money incomes of the mem­bers of the community and non-transfer expenditure which determines directly the uses to which part of the community’s productive resources shall be put.

Pigou says that expenditure of money by government authori­ties may be conveniently separated under two heads, expenditure that purchase current service of productive resources for the use of these authorities and expenditure which consist in payments made either gratuitously or in purchase of existing property rights to pri­vate persons.

The former group includes expenditure on navy-army, Civil service, educational service, judiciary etc. The latter includes expenditure on the payment of interests on governmental debt, pen­sion etc. In the first edition his book, the former type of expenditure, he called, exhaustive, while in the second edition he called it real expenditure.

In the third edition of he says “it is perhaps better to call them simply non-transfer expenditures. The latter type must be called transfer expenditures”.

Non-transfer expenditure implies the actual using up of com­modities and services which would otherwise have been available for some other purpose. In the social accounting sense, non-transfer expenditure always gives rise to creation of output and equivalent money income. For instance when the state pays salary to a sol­dier, then the soldier can utilize his service for no alternative pur­pose.

In the absence of this expenditure his service would have been available for some other purpose. Whereas transfer expenditure does not create any income or output. According to Pigou “it implies only a transfer from the state to the recipients, of command over commodities and services”. For example, social expenditure on old age pension, poor relief etc.

9. Mehta’s Classification:

Prof J.K. Mehta made a two way classification of public expendi­ture. He categorized public expenditure into (a) Constant expendi­ture and (b) Variable expenditure. Mehta says “constant expenditure is that, the amount of which does not depend upon the extent of the use by the people, in whose interest it is incurred and upon the service that are financed by it”.

The expenditure on defence is a clear example for constant expenditure. Variable expenditure is that which increases with every increase in the uses of public services by the people, whose benefit it is incurred. Expenditure on postal service is an example of variable expenditure. Variable expenditure varies with the number of people using the service provided by the state.

The essential feature of Mehta’s classification is that, he uses the element of cost and not benefits the basis of classification. He also recognized the fact that every item of public expenditure cannot be placed wholly under one or other class and hence a clear cut distinction cannot be drawn between them.

10. Productive and Unproductive Expenditure:

Prof. Robinson classified public expenditure into productive and un­productive. Public expenditure is productive if it directly or indirectly helps to develop natural and human resources and help to increase national income.

Whereas public expenditure is unproductive if it does not add to enhancing the productive capacity of the nation. Unproductive ex­penditure is one which is consumed in the process of rendering the service.

11. Economic Classification:

In the social accounting sense most of the countries have adopted economic classification. In this procedure the expenditure and in­come of public bodies are classified into two heads. They are (a) Revenue Account and (b) Capital Account. Revenue account include ordinary source of income and expenditure. Whereas capital ac­count include extraordinary source of income and expenditure.

Revenue expenditure includes all current expenditure on administrator including defence and public commercial undertakings. Usually expenditure which does not result in the creation of assets is treated as revenue expenditure. Whereas capital expenditure includes all capital transactions.

These capital payments consist of capital expenditure on acquisition of assets like land, buildings, machinery, equipment etc. Investments in shares and loans and advances granted by the central government are part of this. This classification is also known as functional classification. This classi­fication provides a more detailed breakdown of revenue and capital expenditures of the government.

12. Plan and Non-Plan Expenditure:

Plan expenditure means the current development outlays as well as investment outlays. Whereas non-plan expenditure refers to the expenditure which the government is bound to incur and cannot do without it. It includes both development and non-development ex­penditure.

A broad based classification of public expenditure is detailed above. Each classification has its own defects and omissions. How­ever, the sphere of state activity is dynamically changing in recent years. The nature and form of activities undertaken by the state is varying in length and attitude. Hence a perfect and systematic clas­sification of public expenditure is very difficult to achieve.

Effects of Public Expenditure:

Public expenditure is an important fiscal instrument to secure many fold social objectives in an economy. The traditional economist held the view that state should not incur more expenditure.

Adam Smith and other classical economists considered public expenditure as ‘unproductive’ and private expenditure was considered ‘productive’. This mistaken notion of the classist arose out of their false belief in the efficacy of Laissez-faire capitalism, in mitigating cyclical fluctua­tions and preserving full employment.

Adam Smith advocated mini­mum activities for the state. That is preservation of the community from aggressions and maintenance of law and order. Hence classi­cal economists were in favour of minimum public expenditure.

However, the world wide depression of 1930’s and the two global wars, proved faulty the classical faith on Laissez-faire. With the ad­vent of Keynes general theory, public expenditure came to be looked upon as an indispensable fiscal instrument of securing social wel­fare and correcting economic instability.

Moreover, there are areas of economy like provision of basic infrastructures, where market mecha­nism completely fails to distribute the cost of output production among expenditure beneficiaries through the pricing system.

Only the pub­lic sector can supply these welfare increasing facilities through bud­getary allocation. Hence in the modern world public expenditure in­fluence the national economy in a manifold manner. It is important therefore to examine how public expenditure affects the economy in various ways and secure social welfare.

1. Effects of Public Expenditure on Production:

According to Dalton the level of production and employment in any country depends upon three factors namely:

(a) Ability of the people to work, save and invest,

(b) Willingness to work save and invest, and

(c) Diversion of economic resources as between different uses and localities.

Public expenditure influences all these factors either posi­tively or negatively. Production depends upon the employment of re­sources by human labour assisted with capital. The capital stock of a country depends upon savings or the surplus over consumption.

Thus the way in which public expenditure effects production is deter­mined by its influence on the willingness and ability of the laborers to work, on the allocation of resources and on the amount of sav­ings. We shall now explain these effects in detail;

(a) Ability to Work, Save and Invest:

Public expenditure can influence ability to work, save and invest either favorably or unfavorably. If public expenditure is used as an instrument to promote the efficiency of a person to work, it will pro­mote production and national income. For example, public expendi­ture on education, medical services, cheap housing facilities etc. can increase the efficiency of a person to work.

At the same time, public expenditure can promote saving on the part of the lower in­come group by providing additional income to them, for, all the per­sons who has larger income can be normally expected to save lower amounts.

It improves their standard of living and efficiency and thereby their ability to work and save enhances. Finally public expenditure, particularly repayment of public debt, will place additional funds at the disposal of those who can invest.

Likewise expenditure incurred on the maintenance of law and order, will create confidence in the minds of the people, thereby creating a favorable investment cli­mate in productive activities. In this way public expenditure can pro­mote ability to work, save and invest and thereby production and employment.

On the other hand, if larger portion of public expenditure is channelized into wasteful social functions, on the production of in­toxicants, harmful drugs etc. it will adversely affect ability to work, save and invest.

Similarly, if heavy public expenditure is made on the construction of film studios, cinema houses, hotels and bars, rather than on the construction of roads, and other means of transport and communication, public expenditure creates unfavorable effect on ability to work, save and invest.

(b) Willingness to Work, Save and Invest:

The effect of public expenditure on the willingness to work, save and invest depends considerably on the expectation of future benefits. It also depends upon the character of public expenditure and the policy of the government. For example, pension, interest on loans, provi­dent fund, sickness benefit etc. provide security and safety to a person.

Therefore it reduces his willingness to work and save. The underlying principle is why should a person work hard and save, when he knows fully, that he will be looked after by the government when he is not in a position to earn any income.

He finds his future fully secured. In the absence of any saving, investment will notarise. Hence public expenditure should be regulated in such a way that it may not adversely affect the incentive to work of the people.

(c) Diversion of Economic Resources:

Public expenditure diverts resources from private to public use in many ways. Public expenditure has far reaching effects on the utili­zation of resources as between alternative uses.

In the first place, there are such diversions of resources from private to public use, about which there is some doubt. Dalton talks about government expenditure on armaments and armed forces.

To meet such expenditure, the government diverts economic resources from the general public to the government. It is thought by many that these economic resources could have contributed to economic wel­fare, if they have been allowed to remain with the people themselves.

But it is also true that defence expenditure is essential for the safety and security of the nation without which no country can flourish eco­nomically. Hence in this context, defence expenditure is important from the national point of view.

Alternatively, public expenditure may bring about a better allo­cation of economic resources between the present and the future. In a free capitalist society, very little provision is made for the future. This is because people prefer the present rather than the future.

The state on the other hand is the custodian of the interest of the future generation. It is the duty of the state to make adequate provision for the future generation. Unlike private individuals, the government can make investments in railways, irrigation projects, afforestation etc., which do not yield immediate returns, but can provide social and economic benefits to the future generation.

The government also spends money in the conservation of economic resources. Hence the diversion of resources from private to public sector for the con­struction of basic infrastructure and for preservation and conserva­tion of scarce resources is very essential for economic development. These kinds of expenditure exert a positive impact on production and economic activity of a nation.

Public expenditure can result in increased production in the so­ciety through changes in pattern and composition of production. Pri­vate sector is interested in maximization of profit and is not con­cerned with efficient allocation of resources. Public expenditure can induce diversion of resources from less essential products to more essential products by offering subsidies and other concessions.

Hence public expenditure in the form of subsidies and grants is helpful in directing the resources of the people to establish new industries as well as to accelerate production of existing industries.

Similarly, public expenditure on social overheads like educa­tion, training, public health etc., produce favorable effect on produc­tion. It will increase social welfare and efficiency of production. Like­wise government spends money for encouraging and developing re­search and development activities and inventions and innovations.

The diversion of economic resources here will greatly increase pro­duction and enhance productive capacity. Government expenditure on public works programmes has also favorable effect on produc­tion and employment.

Sometimes public expenditure may result in diversion of eco­nomic resources as between localities. This is done through central government grants to state governments to provide certain services more efficiently.

This will help to increase productive capacity and to reduce regional inequalities in development. For example, special expenditure in the form of grants incurred to the development of back­ward region help to reduce regional imbalance and to enhance pro­duction and economic development.

Prudently planned public ex­penditure can certainly bring about diversion of resources as be­tween regions which will improve the economic position of backward areas, and thereby increase production and employment.

Further, public expenditure can also modify the allocation of re­sources and thus influence the composition of GNP. For example, an increase in public investment in highway construction may stimu­late automobile and allied industries and this expansion in turn may retard railway expansion.

Similarly, subsidies given for the assis­tance of particular industries may develop them at the expense of others. For example, if grants are given for building houses for middle or poor income groups, resources might flow to construction indus­tries.

On the whole, public expenditure exerts a wholesome influence on production. Dalton’s conclusion on the question of the effects of public expenditure on production and employment is that “whereas taxation taken alone, may check production, public expenditure, taken alone, should almost certainly increase it”.

It is possible that production will definitely be checked if carelessly planned, but it will stimulate production, if carefully planned.

2. Public Expenditure and Distribution:

In most communities and countries of the world, inequality in the distribution of income and wealth exists in different forms. This so­cial problem is undesirable on many grounds ethical, economic and political, among others.

The removal of or reduction in inequality in the distribution of wealth has now universally been recognized as an important objective of state policy. India also envisages a more equitable distribution of wealth.

The tools of fiscal policy are directed towards achieving a fair distribution of income among the different classes of people in the society. The state tries to achieve this ob­ject partly by means of taxation or leveling down the wealth of the rich and partly by means of public expenditure or leveling up the wealth of the poor.

Both fiscal activities are ultimately linked with each other. They are complementary rather than competitive in char­acter.

There are certain items of public expenditure which benefit indi­viduals and those which benefit society as a whole, in the list of expenditure which benefits individuals, the expenditure on social services, in the form of free medical aid and free education out of state funds will benefit the poor more than the rich. Such services imply a net addition to the income of the poorer classes.

Expendi­ture which benefits the society as a whole is those relating to gen­eral improvement. For example, good roads, free water supply in urban areas etc.

However, any attempt to redistribute wealth by public expenditure, may reduce savings, firstly of those who are taxed and secondly of those who receive the benefits of such expen­diture.

In this context Colwyn Committee remarked “the effect of public expenditure on production seems to be in conflict with that on distribution. But up to a certain point, this is not the case. The diffi­culty is to know where the balance should be struck”.

Regressive, Proportional and Progressive Public Expenditure:

Regarding the distributive impact of public expenditure much de­pends on the nature of public expenditure and the policy underlying it. Just as there are proportional progressive and regressive taxes, in the same manner, government grants may be proportional, progres­sive and regressive.

Public expenditure must be on the principle of ‘ability to receive’ (corresponding to ability to pay of taxation), if it has to secure an equitable distribution of wealth. Corresponding to the principle of minimum sacrifice in taxation, there is the principle of maximum benefit in public expenditure.

Broadly, the principle of maximum social advantage should be the underlying criteria of pub­lic spending. From this point of view, expenditure on debt services is regressive because it gives more income to those who are rich.

Old age pension and expenditure on social insurance are progressive. In this context, it should be noted that a government grant reduces the desire to work and save, it lead to reduction of income of beneficia­ries. In this case inequalities of wealth distribution are reduced.

A grant or public expenditure is regressive, if the addition it makes to the income of a beneficiary is smaller in the case of people with small income and higher in the case of people with high income.

The best example is subsidy and interest offered by the government on public debt. The provision of free residence only to higher paid gov­ernment employees and not to low paid employees is a typical ex­ample of regressive expenditure.

In this case benefit of public expen­diture is reaped by the richer income group. This only helps to ag­gravate inequality of income. The public expenditure or grant will be proportional, when the proportion of additional benefit provided by the grant or public expen­diture is the same, whatever the size of the recipient income.

In such case, there is no change in existing inequalities of income distribution. For example, if all categories of employees were given a house allowance at the same rate, say 10% of their salaries, it would be a case of proportional expenditure.

A grant or public expenditure would be progressive, when the additional benefit provided by the grant or public expenditure is larger in the case of low income people and lower in the case of high income people.

The expenditure on social security like free medical aid, free education, subsidized houses etc. is progressive in nature. For example, if only the lower salaried employees were given free residential quarters, it is a case of progressive expenditure.

Such expenditure helps to reduce the glaring inequality existing in the distribution of income. Dalton observes that system of public expen­diture is the best, which has the strongest tendency to reduce the inequalities of income.

Hence progressive public expenditure is the best anti-dot to reduce income inequality existing in the society.

Progressive expenditure can assume different forms. It may be in the form of cash grants-old age pensions, unemployment benefit, sickness and accident benefit. This act as a sort of timely help.

Progressive redistributive expenditure may also take the shape of provision of cheap or free services and commodities. Free primary education, free medical aid, subsidies to food and housing and the provision of free meals to school children are examples of this type of progressive grant.

Such expenditure benefits the poorer among the poorest and helps to raise the living standards of the weaker sec­tions.

Reduction of glaring inequalities in the distribution of income, provision of certain minimum basic facilities to the weaker sections of the community is now rightly regarded as the primary social func­tions of any modern government.

Public expenditure has therefore became an important instrument in the fiscal policies of modern governments to achieve certain social and economic objectives ori­ented towards the welfare of the community.