Recently, in almost all countries of the world there has been a phenomenal increase in the magnitude and the variety of governmental activities. The acceptance the principle of welfare state, the necessity of maintaining full employment and economic development etc. the significant role of the government has been increased. All these show the need for an ever increasing public expenditure. The effect of public on various factors are given below:
Effect of Public expenditure on Production
The roles of private and the public sectors are complementary. The public sector provides the infrastructure, transport and communications, power, education and public health programmes. In the absence of goods and services provided by the government sector, private sector can hardly make any meaningful contribution towards production and development: According to Dalton, other things being equal, taxation should not adversely affect production and public expenditure should increase it as much as possible. Public expenditure can affect
(i) the ability to work, save and invest,
(ii) the desire to work, save and invest, and
(iii) allocation of resources as between different uses. Public expenditure can influence these factors either favourably or unfavourably.
The economies of ,developing countries cannot make significant progress unless they concentrate on development of investment goods sector. This may not result in production in the immediate future, as in education and health programmes, infrastructural projects and projects with long gestation periods. This would, however, certainly build up growth potential in the economy, and help take the economy to a self-generating level.
Effect of Public Expenditure on Economic Development and Planning
Public expenditure plays a crucial role in the economic development and planning. The most important factor in developing countries such as ours that has led to a phenomenal increase in public expenditure is the expansion in developmental activities of the Government. In countries like India which have socialistic tendencies the public sector plays an important role in promoting economic growth and development. Not only public utility services such as water supply, electricity, post and petroleum and transport services have been undertaken by the public sector, but also the Government has invested a huge sum of resources in industrial and agricultural development of the economy.
Several steel plants, multipurpose irrigation projects, fertilizer factories, coal mining, exploration and production of oil and petroleum, different kinds of machine-making industries and chemical plants have been started and are being operated in the public sector. On these a huge amount of expenditure is being incurred by the Government in India. Owing to these developmental activities of the Government in India, the proportion of developmental expenditure to the total Government expenditure has greatly increased.
Effect of Public Expenditure on Economic Stability
Economic stability of a country depends on the public expenditure. In case of depression, heavy public expenditure is to be incurred for increasing investment, capital formation and employment and also for saving the economy from adverse effects of depression. This helps to push the economy out of depression and to raise levels of income and employment. Now, this compensatory fiscal policy is being followed by all the world over, since achievement of full employment and maintenance of economic stability has become an important objective of the Government. On the contrary, in case of boom period public expenditure is incurred in such a way as to increase production and control the rising price-level.
Further, the Indian Government, both Central and States, incur a lot of expenditure on relief public works in rural areas when drought and other natural calamities occurs. Besides, a lot of public expenditure is being incurred on special employment schemes to promote employment in the economy.
Effects of Public Expenditure on Distribution
One of the important modern state policies, especially in developing countries and socialistic countries, is reduction of inequalities in the distribution of income and wealth. Public expenditure plays vital role in realising this objective. According to Dalton, “The system of public expenditure is the best, which has the strongest tendency to reduce inequality of income.” Public expenditure which is in the form of money grants, supply of social goods and services, social security measures, subsidies etc. certainly affects the distribution of income in a country in socially desirable way. Expenditures carried out for benefiting the poor people such as those on social services like free medical treatment, free education, unemployment benefit etc. will enhance the benefit of the poor section than the rich. This will help in reducing the gulf between the rich and the poor in the distribution of income and wealth, thus bringing about justice in the economy.
Effects of Public Expenditure on Consumption
Public expenditure enables redistribution of income in favour of poor. It improves the capacity of the poor to consume. Thus public expenditure promotes consumption and thereby other economic activities. The government expenditure on welfare programmes like free education, health care and housing certainly improves the standard of the poor people. It also promotes their capacity to consume and save.