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Effects of Public Expenditure in an Economy

Updated on July 31, 2017
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IRSHAD CV has been a student in Economics. Now he is doing Masters in Economics. He completed B.A. Economics from the University of Calicut.

Introduction

Public expenditure is one of the important subject matters of public finance. It deals with various expenditures of an authority. Before the Keynesian revolution of 1930s, in economics, public expenditure played very limited role in public finance because most of the economists of that time were believed in the free competition or the so called laissez-faire mechanism. Therefore the solutions for economic problems were dealt by market. But the world witnessed great depression in 1930s, which later impacted in the raise of macroeconomics. From the Keynesian revolution onwards, public expenditure has played a very crucial role in the growth and development of any economy. In fact, since the increasing trend of public expenditure, it has wide effects in the economy. Here this essay is provided some of the major effects of public expenditure.

Broadly the effects of public expenditure can be discussed under the following four heads.

i) Effects on production

ii) Effects on distribution

iii) Effects on growth and development, and

iv) Effects on economic stability.

Each of these effects is briefly explained below.

i) Effects on production

Public expenditure has a wide effect on the production aspects of an economy. It can able to control the level of production indirectly. Public expenditure denotes the support of the authority towards its economy.

Public expenditure can influence the ability to work, save and invest. And also the willingness to work, save and invest. This is because a sufficient amount of public expenditure will ensure the production activities. For instance, government’s public expenditure on developing basic infrastructural facilities will create the ability and willingness to work. This means that, public expenditure can create employment opportunities. Therefore, income of the people will increase. It will gradually create a tendency among people to save. This saving will convert into investment. That means more growth of the economy.

Similarly public expenditure can able to control the resources into various uses and locations. By understanding the requirements of the economy, government can take reasonable policies to improve backward locations and efficient utilization of the resources. In fact, public expenditure plays a vital role on production aspects like resource utilization and economic contribution of various sectors and locations.

There are some direct effects also by the public expenditure. Sometimes government starts industrial activities, projects, schemes etc. which will directly generate employment opportunities, more income, effective demand, and mass production and so on, finally to touch economic growth and development.

ii) Effects on distribution

Public expenditure has wide effects on the distribution function of an economy. Here the effect is the distribution of the public expenditure in to various fields or economic groups. The core aim behind the effect on distribution is that to reduce the inequality. As like in the case of tax (public revenue), public expenditure may be in any of the following three modes based on the ability to receive.

a) Progressive public expenditure

b) Regressive public expenditure, and

c) Proportional public expenditure.

a) Progressive public expenditure: Progressive public expenditure is very essential for any economy to bring economic equality and equity. It may aims more flow of income to the poor class like providing subsidies, social insurance, special schemes etc.

b) Regressive public expenditure: It is not good for any economy to bring economic equality. Here the flow of income is concentrated to the richer class. This will widen the gulf between two classes and by inequality in the society.

c) Proportional public expenditure: Here the flow of income is based on the proportion of income or wealth held by the people. This method may not help to bring any improvements in the society.

iii) Effects on growth and development

Today, there are many discussions all over the world on the topic economics of growth and development. Public expenditure is one of the crucial tools of determining the speed of economic growth and development. By trying to achieve economic growth and development, public expenditure creates wide effects on the improvements in infrastructural facilities, increasing of social overheads, maximum social advantage, welfare, safety, security, reducing inequalities, improvements in the standard of living etc.

iv) Effects on economic stability

Attaining economic growth and development and maintaining its stability are the two main aims of any economy. Economic stability can be achieved only by eliminating the barriers of growth. Public expenditure has a big deal in bringing economic stability. Therefore, sustainability is the most noted point. Simply, economic stability is a condition of an economy where there is no inflation, deflation, unemployment, flexible exchange rate etc.

To cure inflation government must follow surplus budget policy by reducing its public expenditure. On contrary, government must follow deficit budget policy during deflation by expanding public expenditure. This is simply because public expenditure can simply adjust the volume of money or more specifically output in the economy.

Conclusion

Public expenditure has playing an unavoidable role in the present economic systems. Now, it using as a best tool to bring the economic stability, achieving economic growth, reducing unemployment, inequality etc. In short, public expenditure creates a wide and numerous effects in an economy in its various components like production, distribution, utilization of resources and so on.

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      Shukri Abdikarim 

      11 months ago

      It is great. Best topic to know more about it.

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