Public expenditure-Effects

PUBLIC EXPENDITURE-EFFECTS

It can be studied under following heads

a)On Production

b)On distribution

c)On consumption 

d) Miscellaneous 

Effects of public expenditure on production

The level of production and employment in any country depends on three factors

-Ability to work,save and invest

-Willingness to work , save and invest

-Diversion of economic resources

-Ability to work,save and invest 

Public expenditure on education, medical services,housing facilities,availability of basic necessities will increase the efficiency of person to work. 

It can promote saving on the part of lower income groups by providing additional income to them , for a person who has larger income can be normally expected to save a large amount.

Similarly,public expenditure on increasing wages and salaries of the people,supply of goods at cheap rates and expenditure on welfare of society will increase purchasing power,standard of living,efficiency and thereby ability to work and save will also increase. 

Public expenditure incurred for maintain law and order in country will create confidence in the minds of people and thereby encourage them to make investment in production activities.

Thus,as production increases along with larger income in hands of the people, their ability to work save and invest will automatically increase.

-Willingness to work ,save and invest 

Public expenditure also effects the people's -Willingness to work in future. Similarly,expenditure policy of government influence the decision of people in future as to which part of their income may be available for saving and investment. 

If the people do no expect any rise in their income in the future , their willingness to work is certainly bound to be adversely affected . Expectations of future profits accruing from public expenditure,provides incentive for hard work. 

It is this expectation which has encouraged them to work,save and also to invest their savings in productive purposes.

-Diversion of resources

The major areas of -diversion of resources are

a)To unproductive areas : There is diversion of public expenditure to number of unproductive areas such as on armaments and armed force, on police etc . Such an expenditure is called as economic waste . This type of expenditure ought to have been incurred on social security and welfare of the society. But , on the other hand , expenditure on armaments and armed forces is must as it reduces danger of foreign invasion and reduces huge economic loss which would have resulted in event of war. Similarly,expenditure on police and civil administration is also essential for maintenance of law and order inside inside the country.

b)For providing infrastructure :There is also diversion of resources from private to public use by incurring expenditure for providing infrastructure  such as railways, roads , irrigation projects , water etc. This diversion is must in all types of economics i.e developed, developing and even underdeveloped.

c)For social security and welfare activities :It is also essential for conducting social security and welfare activities, such as encouragement to research and inventions , promotion of education, training ,public health , sanitation etc.

d)For reducing regional disparities :Public expenditure can be effectively used for reducing regional disparities by means of establishing labour intensive and subsidized industries, providing basic facilities like water, electricity.  Cheap finance.  Cheap loans and advances etc.

e)For economic growth and maintenance of economic stability:Public expenditure can help private investment and production through measures which reduce cost of production , push up demand . Creation and maintenance of social overheads would lead to an all round reduction in cost of production and improvement in efficiency. Also, social overheads bring different regions and sectors of an economy to dose contact and thereby stimulate economic growth.

Effects on public expenditure on distribution

Public expenditure is most powerful weapon in hands of government for bringing about an equitable distribution of wealth and national income . The government can use not only taxation policy but public expenditure policy also help in achieving its objective. The role of taxation and public expenditure in removing inequalities of income is complementary and supplementary . The income earned through taxation should be spent on providing various types of facilities , subsidies and amenities to poorer sections of community.

Effects of public expenditure on consumption

Public expenditure also affects consumption . Due to public expenditure the size of consumption tends to increase in economy. Since public expenditure tends to redistribute the income in favour of poor people and their marginal propensity to consume being high , the overall impact of public expenditure leads to a rapid increase in consumption of economy.

Miscellaneous effects

a)On economic stability : public expenditure has proves to be powerful tool for bringing about economic stability in country. It is an excellent instrument for regulating and controlling volume of employment. The government should make substantial increase in public expenditure at time of depression, because this will help bring about an automatic increase in volume of employment.

b)On economic growth : There is close relationship between public expenditure and economic growth . A rising proportion of additional output should be developed to capital formation , so that the economic growth of an undeveloped country may be speeded up.

c)On employment :Public expenditure may directly help to provide employment to several individuals and by increasing these people demand for goods and services, it may further increase employment opportunities , as increase in demand will lead to greater production and Thereby provide employment to an army of unemployed persons.