Public expenditure is the expenditure incurred by public authorities-central,

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Jeremy Melton
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1 1.1 Introduction Public expenditure is the expenditure incurred by public authorities-central, state and local governments either for the satisfaction of collective needs of the citizens or for promotion their economic and social welfare. The public expenditure can be broadly classified into two types developmental and non developmental expenditure. The functions and responsibilities of the countries, have undergone virtually a metamorphosis since the onset of the great depression of the thirties. The structure and content of public budget have received wider attention and serious thoughts have been bestowed as to how attune it to cope with the predominant development requirements. As a result, the budget no longer remains a statement of government accounts or an exercise in raising revenues and financing outlays. Instead, it is now regarded as a powerful fiscal instrument to influence such economic indicators as production, prices and employment. This is also seen as a proper frame within which one can provide for plan outlays for achieving such national objectives as eradication of poverty and unemployment and achievement of sustained pace of development. 12

2 The distinguishing features of the role of public expenditure in the context of developed and developing economies are worth mentioning. In case of the former, the role of public expenditure includes prevention of cyclical fluctuations and counter acting any secular tendency towards stagnation. Thus, it is more rectification and of the nature of what could be called maintenance. But the role of public expenditure in a developing economy is to cause, guide and direct the rate of growth, employment and productivity as also to improve income distribution since such economies are fundamentally confronted with the problem of idle human and physical resources, poverty and income disparities of high proportions, both vertically and horizontally. The public expenditure policy is designed to perform these distinct functions other words logically speaking, the role and philosophy of public budget and expenditure in a developing economy like India should lead to. i) Promotion of economic development, ii) iii) iv) Redistribution of income, Removal of regional imbalances, Provision of basic amenities of life education, health care and drinking water v) Eradication of poverty and thereby ensuring social justice to the people. 13

3 The objectives of public expenditure are (a) provision of collective wants in order to optimize society s consumption in a traditional way and to maximize social and economic welfare and (b) control of the depressionary tendency in the market economy. Public spending should be designed to optimize the level of investment in such a way as to maintain full employment with growth. In a free enterprise economy, through public expenditure incurred for appropriate public works programme, the gap of inadequacy of investment in the private sector has to be filled up adequately. According to Keynes, public spending is, required to sustain the level of effective demand in an economy. (c) In a backward economy, public expenditure should accelerate the tempo of economic development by constructing the infrastructure of the economy and increasing capital formation for augmenting industrial activity and allied production of goods and services. (d) A better distribution of income is also an equally important goal under socialism. Public expenditure for prevailing public services should lead to a just distribution of welfare. The importance of public expenditure in underdeveloped economies is realised from the fact that the state, under democratic set up is called upon to play an active and important role to promoting economic development. The role of public expenditure in under developed countries are considered in terms of 14

4 economic development, Redistributions of income and balanced regional development. 1.2Economic Development Major objectives of the fiscal policy in an under developed country is the attainment of a high rate of growth. The rate of growth of an economy can be maximized through rapid development of heavy and basic capital goods public expenditure and creation of economic and social over heads such as, transport, communication, and banking. Since public expenditure concentrates on the development of investment goods sector and social over heads, it would lead to a more rapid rate of growth of output in the long run. The objective of development in an under developed economy is to reach as soon as possible the stage from where on the further progress of the economy can be proceeded essentially on the basis of internal resources. This big push may not be possible in the absence of public investment expenditure. 1.2 Removal of Inequality For grater distributive justice in the growth process in the Indian economy, the investment of the weaker section of the population will be necessary as 15

5 participants, in the process of development as well as in the sharing of its fruits. For this purpose direct measures are suggested to tackle the problem of poverty. These include programmes which would involve the bulk of the population in the productive employment to increase their earing capacity so that both growth and distributive justice can be achieved. 1.3 Balanced Regional Development It is the responsibility of the government through public expenditure to break the vicious circle in which the poorer states or regions in a large country are invariably caught. Thus, public expenditure has to play a dominant but basic role in lifting up the backward and underdeveloped areas from the state of the poverty, low productivity and large scale unemployment to the level of entering into the process of self sustained growth. Thus public expenditure plays a dominant role in the development process of less developed economies. 1.5 Wagner s Law 16

6 Adolfh Wagner, a German economist of the latter part of the nineteenth century, presented his famous Law of the increase of state activities in these terms. Comprehensive comparisons of different countries and different times show that, among progressive people, with which alone we are concerned, an increase regularly takes place in the activity of both the central and the local governments. This increase is both extensive and intensive, the central and local government constantly under take new functions more efficiently and completely. In thie way the economic needs of the more satisfactory fashion, are provided by the central and Local Government. 1.6 Classification of Public Expenditure In recent years the economic classification of the budget has become very important in view of the development of the technique of social accounting. (1)Carl C. Plehn divides expenditure according as they confer special benefits on particular members of the community or common benefits on all or benefits which are party common and partly special. Thus, he classifies public expenditure into the following four categories. i) Expenditure which confers a special benefit on all citizens, for example, expenditure on defence; 17

7 ii) Expenditure which confers a special benefit on certain classes that is treated as a common benefit, because of the in capacity of these classes, for example, expenditure on poor relief; iii) Expenditure which confers both a special benefit on certain persons and a common benefit on all others, for example, expenditure on roads and building of sewers, iv) Expenditure which confers only a special benefit on individuals, for example, expenditure on state public expenditure. (2) J.S. Nicholson classifies public expenditure according to the amount of revenue the state realizes in return for the services which it performs through public expenditure. relief; (i) Expenditure without direct return of revenue for example, that on poor (ii) Expenditure without, direct return of revenue but with indirect benefit to revenue, for example, that on free education. (iii) Expenditure with partial direct return of revenue for example, that on education for which fees are charged. 18

8 (iv) Expenditure with full return of revenue or even profit, for example, that on post office, and railways. Adams gives us a functional classification based on a classification of various functions actually performed by public authorities. (i) Protective for example, expenditure on defence and polices; (ii) Commercial, that is expenditure which helps commerce, such as, bounties, and industrial exhibitions. (iii) Developmental expenditure that develops the resources of the country, such as, education, roads, railways, post and telegraphs. superfluous. Roscher classifies public expenditure into (a) necessary (b) useful and (c) Necessary expenditure is that which that state must incur end which cannot be which is desirable but can perhaps be postponed. Superfluous expenditure is that which the state may or may not incur. We are doubtful whether the state should ever incur expenditure which is superfluous. Dalton classifies public expenditure into grants and purchase price. When the state incurs expenditure and does not get any commodity or services in return, the expenditure is classified as a grant, for example, poor relief or scholarships. 19

9 When, however, the state acquires or gets some commodity or services in return, the expenditure is a purchase prices, for example, the salaries of government employment employees or the price paid for purchasing a type writer. G.Findly Shirras says, the ideal classification for most purposes is a functional one; his classification is based on the primary and secondary functions of the government. According to him primary expenditure includes the all expenditure which governments worthy of the name of governments are obliged to undertake, for example, expenditure on defence and law and order, this expenditure is necessary for the existence of the state. On the other hand, secondary expenditure includes social expenditure on public undertakings. However it may be pointed out that primary and secondary are relatives terms; that which is primary is less secondary and vice versa. Professor J.K. Metha classifies public expenditure into constant and variable of which does not depend on the decision of individual consumer to make a greater or smaller use of the public service financed by such expenditure, for example, expenditure on defence or street lighting. Such expenditure is incurred irrespective of the number of people using of the service. It some individuals decide to carry torches in their hands while walking on the road, the government will not make any savings in the expenditure on street lighting on the other hand, if some people decide to use street lighting throughout the night, the expenditure does not 20

10 increase. Thus, decisions of individual consumers do not the volume of expenditure. Variable expenditure is that whose volume depends on the decisions of individual s consumers to make a greater or lesser use expenditure, for example, expenditure on poor relief of scholarships. This expenditure varies with the number people using these benefits provided by the state. 1.7 Economic Classification In India, an economic classification of the governments budgetary transactions was presented for the first time in 1957 with respect to the central budget for , the budgetary transactions of the government are classified on the basis of purchase of commodities and services and transfers. The classification divides the expenditure of the government into current and capital account. The expenditure on current account is presented in two accounts. (1) expenditure on government administration and (2) departmental commercial undertakings. Such as railways, post and telegraphs. Capital expenditure is intended for the creation of not productive assets in the economy. Expenditure on constructions of dams, public works, state enterprises, agricultural and industrial developmental are instance of capital expenditure. 21

11 1.8 Statement of the Problem Continuous increase in public expenditure is not desirable as it increases the deficit in the budget. Reduction in public expenditure also cannot go down below the minimum level as it will affect the growth of on economy. Therefore it is essential to keep the public expenditure at an optimal level so as to boost the economic growth. But in Tamil Nadu public expenditure is growing in an alarming proportion which draws the attention of the policy makers. If the expenditure is diverted towards development activities it will promote the process development of the state. Whereas more funds allotted for non development expenditure will be highly disadvantageous to the development of the state, more over it is necessary to compare the growth of public expenditure with net state domestic product of the state. 1.9 Need of the Study Now a days there is an increase in the public expenditure and this has created an in stick desire to study the public expenditure with a view to understand whether the public expenditure has yielded the real fruits of the economy over a 22

12 period of time. Though the public expenditure is the cause for so many development activities, it is also the cause for many economic problems and lately there is a strong reasoning for minimizing the role of public expenditure. The above said reasons emphasize the need for taking up the research work Research Gap Review of earlier works on the growth and structure of public expenditure has helped the researcher to identify the Research Gap. There are sufficient studies pertaining to public expenditure studying and growth and structure at Tamil Nadu level. There are also a few that throw light on the two inter-related aspects of the public expenditure namely growth and structure. However, the studies discussing growth and pattern of public expenditure combined are very much limited. Moreover, most of the earlier studies throw lic on thee growth of public expenditure at Tamil Nadu. Earlier studies discussing the development of public expenditure in various aspects at state level particularly at Tamil Nadu level is very much limited. Hence, the present study makes an attempt to study the growth and structure of public expenditure in Tamil Nadu. Thus, the present study is not only attempt to fill up the above mentioned research gap but it also a piece of contribution to the existing knowledge about various aspects of public expenditure. Moreover, this study is 23

13 both follow up work and improvements over the previous studies on the public expenditure of the Tamil Nadu Scope of the Study In the present study, an attempt is being made to study the trend and composition of Tamil Nadu state government expenditure for a thirty years time period for which uniform time series date is available. The various aspects which evoke interest in such a time series analysis include the composition of the same as under various activities performed by the government and the changes that have taken place in the composition. Analysis of such expenditure in terms of development, non- development categories and also the economic nature of such social economic services and fiscal services would help in understanding the nature and the usefulness of public expenditure Limitations The study is based on the secondary data compiled from the various issues of Tamil Nadu-An economic Appraisal. This study deals with public expenditure of the government of Tamil Nadu. No attempt has been made to make a comparative analysis with other states. 24

14 The study has focused only on the growth and pattern of public expenditure of Tamil Nadu and it has not analyzed the other aspects of public expenditure such as the impact of public expenditure on production, consumption or standard of living. This study covers only thirty years period ( to ) Plan of the Study The study is divided into seven chapters. The first chapter is introductory in nature dealing with importance of public expenditure, meaning and definition of public expenditure, statement of the research problem, need for the study, research gap, scope of the study, limitations of the study and plan of the study. The second chapter deals with objectives and methodology, tools of analysis, source of data, time period of analysis, concepts used in this study and profile of the public expenditure. The third chapter reviews some earlier works by categorizing them under four head studies pertaining to growth of Public expenditure, studies discussing the structure of Public expenditure, studies related to the growth and structure of public expenditure. The fourth chapter analyses the growth of public expenditure in Tamil Nadu and it examines the nature and extent of major group wise public expenditure 25

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