Public expenditure has a great bearing on economic development and social welfare of a country.

Following observations may be noted in this regard.

According to Dr.Dalton, public expenditure tends to affect the level of production in the
following manner:
1. Capacity to work and save
 As a result of public expenditure, capacity to work and save tends to rise.
 Government expenditure provides various kinds of social and economic facilities
stimulating the capacity to work of the people.
 Increased capacity implies increased efficiency and greater employment.
 Level of income and saving tends to rise facilitating greater investment and adding to the
pace of growth.
2. Desire to Work and save
 Expenditure incurred by the government promotes the will to work and save. As a result,
their income and standard of living tent to rise.
3. Productive Utilization of Resources
 Public expenditure restores a balance in the economy by focusing on those areas of
production which generate maximum linkages effect.
 Public expenditure acts as a pump-priming, attracting idle resources to their productive
utilization.
 Accordingly, production level tends to raise the resources from unproductive activities to
productive ones.
 This results in increase in production.
Effect of Public Expenditure on Distribution
Public expenditure affects distribution in the following possible ways:
1. Regional Inequality
This is how public expenditure can promote equality across different regions of a country:
 The government expenditure should focus on development of backward areas, increasing
the level of production and income of the people of those areas. Their standard of living
will increase to catch up with the living standards in developed regions of the country.
  Public expenditure should include financial help to the small-scale and cottage industries.
These industries have the merit of easy-diversification across different parts of the
country. Accordingly regional inequality is expected to improve.
2. Distribution of the Dividends of Industrial Development
 As a result of public expenditure, public sector industries in the country.
 The workers employed in these Industries are paid higher wages.
 They get some facilities also, better than others.
 Following the public sector industries, private sector industries also provide higher wages
and other facilities to the workers.
 Increase in the workers’ wages will lead to the reduction in economic inequality.
3. Benefit to the Weaker Section
 If the government makes public expenditure on social services like education, medical
care, unemployment allowance, labor welfare etc.
 after collecting resources by way of taxes from the rich class, it will result in the increase
in real income of the poor people, thus tilting the distribution further in their favor.
4. Increase in the Ability to work of the Poor
Distribution of income can also be influences by increasing the ability to work of the poor with
the help of public expenditure. This objective can be achieved in two ways:
 Direct Help: The government can provide direct help to the poor people in the form of
cash, commodities and service.
 Indirect Help: The government can provide loans to the poor at a low rate of interest. It
can provide them food at fair price. It can provide more social services to them. As a
result of it, their efficiency will be increased. With rise in their income level their
standard of living will improve.
Public Expenditure and Economic Stability

 Cyclical changes are an inherent character of a market economy.

 These changes are called Trade Cycles, and are manifested as the state of recession,
depression, recovery and boom.
  The states of recession and depression are particularly dangerous for restricting the pace
of growth.
 Inflation is equally bad when it tends to be galloping or hyper. Note the following
observations to understand how public expenditure facilities economic stability:
1. Public Expenditure and depression
 During depression, the prices of commodities tend to fall.
 Accordingly there is a fall in production and employment.
 Unemployment increases.
 Both the producers and the consumers become pessimistic.
 Producers reduce output because of the lack of demand.
 Consumers, hoping for a further fall in prices, suspend their existing consumption needs.
Accordingly, reduction in demand is compounded.
 As a consequence, the vicious circle of reduced demand, reduced production, and
reduced employment sets in. Here comes the significance of public expenditure.
 According to Keynes, in the state depression, the government should plan for a
comprehensive increase in public expenditure. It can be of two types:
i. Compensatory Expenditure
 It includes those spending which the government makes on public works so as to increase
employment and aggregate demand.
 Such spending generate multiplier effect on income.
 Income rises in consonance with increased employment, acting as an anti-dote the
situation of depression.
ii. Pump Priming Expenditure
 During the depression periods, investment is low.
 If investment is made in public sector, it will prompt private investment as well.
 Public expenditure thus made is called pump priming.
 Initial expenditure by the government particularly on infra-structural facilities, tends to be
conductive for an all-round growth of private investment.

Taylor categories public expenditure during depression as

(a)Home Relief
(b) Unemployment Compensation Plans, and
(c) Work Projects.
a) Home relief is provided to the poor so as to increase their consumption, without getting their
services. This is a kind of transfer payments expected to raise consumption expenditure.
b) Unemployment Compensation Fund is set with the help of the employers, employees and the
government. Help is provided to the workers during the period of unemployment out of this
fund.
c) Work projects include public works like construction of roads, bridges and dams, etc.
Expenditure on such projects will projects will generate income to combat deflation through
increased demand.
2. Effect of Public Expenditure and Inflation
Public expenditure can be used as a policy instrument to curb inflation.It should focus on the
following areas:
i. Increase in Production
 Public expenditure should be utilized for increasing production.
 Increase in production during inflation implies increased flow of goods and services in
the economy in the backdrop of rising prices, increased flow of goods and services will
help strike a balance between demand and supply.

ii. Reduction in Consumption

 In a state of price-rise, the government should reduce its consumption expenditure.
 This will reduce the pressure of demand on the goods and services.
 Accordingly prices are expected to fall, or at least their pace of rise will be arrested.

Public expenditure and economic growth

 Although the relationship between government expenditure and economic growth has
attracted the attention of economists, policy makers and politicians over the years, the
debate is still raging.
 The bone of contention is whether the impact of government size on economic growth is
positive, negative or insignificant.
 According to the Keynesian theory, government spending has a positive impact on
economic growth.
 The Keynesian theory postulates that the more a government spends, the higher the
economic growth is as a result of expansionary fiscal policy
 The premise is that as the government spending trends up, production will follow suit,
leading to aggregate demand stimulation, and therefore, increased levels of GDP.
 Private investment is another channel through which government spending can exert
positive effects on economic growth.
 Classical, the Neoclassicals and the public choice theorists, who claim that government
expenditure is bad for economic growth as a result of the crowding-out effect – as
spending by governments’ displaces critical investments by the private sector due to
resource constraints