Public expenditure refers to Government spending incurred by Central, State and Local governments of a country.
Public expenditure can be defined as, “The expenditure incurred by public authorities like central, state and local governments to satisfy the collective social wants of the people is known as public expenditure”.
1. Classification on the Basis of Benefit:
Cohn and Plehn have classified the public expenditure on the basis of benefit into four classes:
Public expenditure benefiting the entire society, e.g., the expenditure on general administration, defence, education, public health, transport.
a) Public expenditure conferring a special benefit on certain people and at the same time common benefit on the entire community, e.g. administration of justice etc.
b) Public expenditure directly benefiting particular group of persons and indirectly the entire society, e.g. social security, public welfare, pension, unemployment relief etc.
c) Public expenditure conferring a special benefit on some individuals, e.g., subsidy granted to a particular industry.
2. Classification on the Basis of Function:
Adam Smith classified public expenditure on the basis of functions of government in the following main groups:
a) Protection Functions: This group includes public expenditure incurred on the security of the citizens, to protect from external invasion and internal disorder, e.g., defence, police, courts etc.
b) Commercial Functions: This group includes public expenditure incurred on the development of trade and commerce, e.g., development of means of transport and communication etc.
c) Development Functions: This group includes public expenditure incurred for the development infrastructure and industry.
The modern state is a welfare state. In a welfare state, the government has to perform several functions viz Social, economic and political. These activities are the cause for increasing public expenditure.
1. Population Growth
During the past 67 years of planning, the population of India has increased from 36.1 crore in 1951, to 121 crore in 2011. The growth in population requires massive investment in health and education, law and order, etc. Young population requires increasing expenditure on education youth services, whereas the aging population requires transfer payments like old age pension, social security & health facilities.
2. Defence Expenditure
There has been enormous increase in defence expenditure in India during planning period. The defence expenditure has been increasing tremendously due to modernisation of defence equipment. The defence expenditure of the government was ₹ 10,874 crores in 1990-91 which increased significantly to ₹ 2,95,511crores in 2018-19.
3. Government Subsidies
The Government of India has been providing subsidies on a number of items such as food, fertilizers, interest on priority sector lending, exports, education, etc. Because of the massive amounts of subsidies, the public expenditure has increased manifold.
The expenditure on subsidies by central government in 1990-91 was ₹ 9581 crores which increased significantly to ₹ 2, 29,715.67 crores in 2018-19. Besides this, the corporate sectors also receive subsidies (incentives) of more than ₹ 5 lakh crores.
4. Debt Servicing
The government has been borrowing heavily both from the internal and external sources, As a result, the government has to make huge amounts of repayment towards debt servicing.
The interest payment of the central government has increased from ₹ 21,500 crores in 1990-91 to ₹5, 75,794crores in 2018-19.
5. Development Projects
The government has been undertaking various development projects such as irrigation, iron and steel, heavy machinery, power, telecommunications, etc. The development projects involve huge investment.
There has been an increase in urbanization. In 1950-51 about 17% of the population was urban based. Now the urban population has increased to about 43%. There are more than 54 cities above one million population. The increase in urbanization requires heavy expenditure on law and order, education and civic amenities.
Setting up of basic and heavy industries involves a huge capital and long gestation period. It is the government which starts such industries in a planned economy. The under developed countries need a strong of infrastructure like transport, communication, power, fuel, etc.
8. Increase in grants in aid to state and union territories
There has been tremendous increase in grant- in-aid to state and union territories to meet natural disasters.