Public economics unit 3 public expenditure and public debt

presentation of public expenditure and public debt
MA. Economics (semester 1)
public economics

1. PUBLIC ECONOMICS UNIT:- 3 Public Expenditure and Public Debt NISHALI B. PRIYA R. PAVITHRA R. FATHIMA FASHIHA M.F. PRIYANGA B. SONIYA B

2. Public Expenditure Public Expenditure refers to Government Expenditure. It is incurred by Central and State Governments. The Public Expenditure is incurred on various activities for the welfare of the people and also for the economic development, especially in developing countries. In other words “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 .”

3. Importances of Public Expenditure To promote rapid economic development. To promote trade and commerce. To promote rural development To promote balanced regional growth To develop agricultural and industrial sectors To build socio-economic overheads eg. roadways, railways, power etc. To exploit and develop mineral resources like coal and oil. To provide collective wants and maximise social welfare. To promote full – employment and maintain price stability. To ensure an equitable distribution of income.

4. Objectives of Public Expenditure Administration of law and order and justice. Maintenance of police force. Maintenance of army and provision for defence goods. Maintenance of diplomats in foreign countries. Public Administration. Servicing of public debt. Development of industries. Development of transport and communication. Provision for public health. Creation of social goods.

5. Similarities between Public and Private Expenditure Similarities Same Welfare Objective Rationality Scarcity of Resources Loans are Repayable

6. Difference between Public and Private Expenditure

7. Classification of Public Expenditure Public Expenditure Revenue Expenditure Capital Expenditure Development Expenditure Non- Development Expenditure

8. Reasons for Growth of Public Expenditure The New Concept of Welfare State War and National Defence Population Growth Growth of Democratic Institutions Provision of Economic Overhead The Problem of Urbanization: Rising Trend in Price Level Adoption of Planning Education and Human Capital Formation Modernization of Agriculture Industrial Development Provision of Public Goods and Utility Services Servicing of Public Debt Protection from the Maladies of Market Mechanism Economic Depression Maintenance of Law and Order

9. Canons of Public Expenditure CANONS OF MAXIMUM SOCIAL BENEFIT. CANONS OF ECONOMY. CANONS OF SANCTION. CANONS OF SURPLUS OR BALANCED BUDGET. CANONS OF FLEXIBILITY OR ELASTICITY.

10. Wagner's Hypothesis Of Public Expenditure Introduced by Adolf Wagner – German political economist (1835-1917) He pro­pounded an empirical law to analyses and explains the trend in the growth of public expenditure. Wagner hypothesized a functional relationship between industrial­ization and the relative importance of public sector activity. Wagner’s Law of Increasing State Activity.

11. Wagner's present his law in below mentioned words Intensive increase means expansion of traditional functions of the State on large scale. Extensive increase means relates to coverage of new welfare functions.

12. Public Expenditure Continuous Increases Due To 3 Reasons Expansion of traditional functions Coverage of new functions Expanding sphere of public goods Factors Affecting Public Expenditure Activities Both demand side and supply side of public expenditure activities. Demand side of public expenditure activities. Supply side of public expenditure activities. Wagner believed that public expenditure will increase faster that the increase in per capita income of people.

13. Formulation of Wagner's Law is that " As per capita income rises in industrializing nations their public sector will grow in relative importance." Criticisms of Wagner's Hypothesis   Lacks interdisciplinary approach Lacks comprehensiveness Ignores the influence of war Stresses a long term trend of public economic activity

14. Peacock and Wiseman Hypothesis This hypothesis regarding the growth of public expenditure was put forth by Peacock and Wiseman, in their empirical study of public expenditure in U.K. for the period 1890-1955. Peacock and Wiseman emphasize the time pattern of public spending trends rather than striving for a genuine positive theory of public sector growth. Their analysis involves three related ele­ments. These are displacement, inspection and concentration ef­fects.

15. Displacement Effect The figure reveals that as the social disturbance cause a relative expansion of the public sector, the dis­placement effect which occurs helps to explain the time pattern by which the government growth takes place. Inspection Effect Inspection effect is the inadequacy of revenue in comparison with the ‘required’ public expenditure. Concentration Effect It refers to the apparent tendency for the central government economic activity to become an increasing proportion of total public sector economic activity, when a society is experiencing economic growth.

16. Samuelson and Musgrave Approach The theory of optimal public expenditure developed by samuelson is a cornstone of public economics. Stimulus spending required to fill the output gap. In the traditional approach to taxation, the government uses a linear income tax to finance public expenditure. However, the many areas of public expenditure call for the prioritizing of expenditure on growth enhancing sectors of the economy of which infrastructure are of utmost necessity.

17. COLIN CLARK HYPOTHESIS This hypothesis tells the optimum level of public expenditure. This hypothesis concerns with the tolerance level of taxation. If government expenditure is more than 25%, then it will lead to inflation. So critical limit of government activity/share is 25%. Public expenditure beyond this limit means disincentive to producer and fall in production due to taxation beyond tolerance level.

18. Public Debt Public debt refers to borrowing by a government from within the country or from abroad, from private individuals or association of individuals or from banking and NBFIs Public debt is the total amount borrowed by the government of a country. In the Indian context, public debt includes the total liabilities of the Union government that have to be paid from the Consolidated Fund of India. Sometimes, the term is also used to refer to the overall liabilities of the central and state governments.

19. Causes of Public Debt 1. War or war-preparedness, including nuclear programmes 2.To cover the budget deficits on current account 3.To undertake public welfare schemes 4. Urge for economic growth 5. Inefficiencies of public organisations and corruption

20. Classification of Public Debt Source of Public Debt Internal and External Debt Productive and Unproductive Debt Short-term and Long - term Debt Redeemable and Non- Redeemable Debt Funded Debt and Floating or Unfunded Debt Marketable and Non- Marketable Debt Voluntary and Compulsory Debt Gross and Net Debt Internal Source Individual and Private Organisations Financial Institutions Commercial Banks Central Bank External Source Foreign Organisations International Financial Institutions Foreigners

21. Debt Burden Debt burden is the cost of servicing debt . For consumers, it is the cost of interest payments on debt . The debt burden will be higher for credit cards and loans with high interest. The debt burden on mortgages will be relatively lower compared to the value of the loan. Burden of Internal Debt Burden of External Debt Direct real burden Direct money burden Indirect money burden Measurement

22. REDEMPTION OF PUBLIC DEBT Redemption of debt refers to the repayment of a public loan although pubic debt should be paid,debt redemption is desirable too. In order to save the government from bankruptcy and to raise the confidence of lenders,the government has to redeem its debt from time to time.

23. References Books:- Public Finance in Theory and Practice - R.A. Musgrave and P.B. Musgrave Public Finance and Public Policy - Arye Websites:- www.askanydifference.com www.accountingnotes.net www.financialexpress.com www.sites.google.com www.edurev.in www.economicsdiscussion.net www.toppr.com Youtube Links:- www.youtube.com/watch?v=kVl8x92fj24 www.youtube.com/watch?v=ypzITn084Us

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