Public Expenditure & its Classifications, Canons, Causes, Effects & Theories.pptx

The meaning, classifications, canons, theories, effects, and trends in public spending are all included in this ppt. This has been prepared to aid students in understanding and help them achieve the best grade possible. Kindly provide your insightful opinions and recommendations. For additional details, get in touch with Dr. T. Aasif Ahmed.

1. Public Expenditure Dr. T. AASIF AHMED DEPT. OF ECONOMICS MAZHARUL ULOOM COLLEGE AMBUR-635802 TAMIL NADU M. NO: 9944029901 E-MAIL ID: [email protected]

2. Canons of Public Expenditure S pending made by the government of a country on collective or individual needs and wants of public goods and public services . Economist George Findlay Shirras  laid down the following four canons of public expenditure, although some are understood not to be required : Canon of benefit – public spending must be done in a manner that it brings greatest social benefits. Canon of economy – it says that economy does not mean miserliness. Public expenditure must be made productively and efficiently. Canon of sanction – public spending should not be made without sanction of an appropriate authority. Canon of surplus – public revenue should exceed government expenditure, this avoiding a deficit. Government must prepare a budget to create a surplus.

3. Classifications of Public Expenditure   Mrs. Hicks’s Classification Defense Expenditure Civil Expenditure Economic Expenditure Social Expenditure   Findlay Shirras’s Classification Primary Expenditure Secondary Expenditure   Adam Smith’s Classification Functional Classification--- Four functions Maintenance of law & order Justice Maintenance of Public utilities Sovereignty Economic Classification Current Expenditure Capital Expenditure

4. PURE THEORIES OF PUBLIC EXPENDITURE Pigou’s Ability to pay: the Ability to pay theory presented by an English economist- A.C. Pigou (1877 –1959) is considered to be one of the Influential theories. The ability-to-pay principle of taxation maintains that taxes should be levied according to a taxpayer's ability to pay . Benefit Analysis: It was developed by Erick Lindahl . It was further developed by Johansen and Bowen. The optimal determination of public expenditure is on the basis of benefit principle. Samuelson theory: The pure theory of public expenditure, given by Samuelson, provides the optimality condition in an economy that produces public and private goods. Public Expenditure has been categorized into Plan & Non- plan expenditure, & Revenue and Capital expenditure. Johansen Theory: The Johansen theory of public expenditure, also known as the Johansen equation, is an economic theory that seeks to explain the relationship between government spending and economic growth . This theory was developed by the Norwegian economist Finn E. Kydland and Bengt Holmstrom in the late 1970s.

5. GENERAL THEORIES OF PUBLIC EXPENDITURE Wagner Law: Wagner's law, also known as the law of increasing state activity , is the observation that public expenditure increases as national income rises. It is named after the German economist Adolph Wagner (1835–1917), who first observed the effect in his own country and then for other countries.

6. T esting Wagner's law in individual countries South Africa : "Wagner's law finds no support in South Africa ." Turkey : "The results of this study do not support the empirical validity of Wagner's law for Turkey for the period 1960-2000 ." Nigeria : "There exists no long-run relationship between government expenditure and output in Nigeria ." Taiwan : "There exists no long-run relationship between government expenditures and output in...Taiwan ." China : "There exists no long-run relationship between government expenditures and output in China ." New Zealand : Study finds "support for Wagner's Law" in New Zealand . Greece  and  Portugal : Study finds mixed evidence . India : Study finds "strong evidence of Wagner's law" in India . Sri Lanka : "The long-run results showed no strong evidence in support of the validity of the Wagner's law for Sri Lankan economy ." Iraq : "There is some evidence for the existence of Wagner's Law when income and several forms of expenditure are denoted in nominal terms. When expenditure in real terms is examined the chain of causality runs in the opposite direction ."

7. Peacock-Jack Wiseman Hypothesis 2. Peacock-Jack Wiseman Hypothesis: It focused on the pattern of public expenditure and concluded that public expenditure does not increase in a smooth and continuous manner, but in jerks or step-like fashion. However, the approach of the hypothesis is made of three separate concepts. Displacement Effect Inspection Effect Concentration Effect

8. Colin Clark Hypothesis 3. Colin Clark Hypothesis or Critical Limit Hypothesis: The critical limit hypothesis concludes from the empirical data drawn from several western countries for inter-war period that the inflation in the economy necessarily occurs when the share of the government sector, as measured in terms of taxes and other receipts, exceeds 25 per cent of the aggregate economic activity in the economy.

9. CAUSES/REASONS FOR THE GROWTH OF PUBLIC EXPENDITURE   Welfare state To meet the Defence needs Agricultural Development Urbanisation Democratic and Socialistic structure of the government Rural development Industrial development Population growth Growth of Transport and communication Increase in National Income Trade Cycle fluctuations Expansion of Traditional Functions

10. EFFECTS OF PUBLIC EXPENDITURE   Effects of public Expenditure on Production Effects of public Expenditure on Distribution Effects of public Expenditure on Economic Stability Effects of public Expenditure on Economic Growth

11. ROLE OF PUBLIC EXPENDITURE IN DEVELOPING ECONOMY Development of Infrastructure Better allocation of resources Employment of idle Economic Resources Effect on Ability and willingness to work, save and invest Balanced Regional Development Poverty Alleviation Programmes Population Control and Family Planning R&D activities Social Security Measures

12. Cont.