Objectives of Public Expenditure:

Traditional Economists: lesser importance

Keynesian Revolution: Revolutionized the entire thinking on the subject.

Main Objectives of Public Expenditure: Allocation of Resources Distribution of Income Stabilization Economic Development

We know that in capitalism the price mechanism allocates resources amongst different uses. Therefore Producers will only produce those goods where they enjoy positive profit. Thus the budget policy is aimed at allocating the resources in such a way that the production of social goods could be increased or an optimal mix of public and private goods could be produced.

Current Consumption vs. Current Investment

The resource allocation can be undertaken either for the distribution of current consumption or for the distribution of investment or for the fulfillment of collective wants.

Allocation (Cont…)

For lesser developed countries it may be useful to keep the level of current consumption down to obtain savings for stepping up investment.

Public investment may be undertaken either to secure or maintain full employment or for securing the highest rate of economic growth.

Allocation (Cont…) Fulfillment of Collective Wants

The supply of goods and services for satisfying collective wants is another area in which allocation through public expenditure is necessary.

Public goods and services are such that they cannot be provided through the market.

Allocation (Cont…)

The state has to take recourse ( the fact of having to, or being able to, use sth that can provide help in a difficult situation) to spending when in a particular area productive efficiency cannot be ensured.

But the entire issue of allocation of resources cannot be considered in isolation without relating it to income distribution.

Distribution of Income:In the absence of govt intervention, the distribution of income and wealth in a society depends upon his resources, skill and inherited amounts.

Distribution of national income and welfare is considered as the most fundamental function of the state.The question of maximizing social welfare through an equitable distribution of income has been thoroughly investigated stating that the social welfare can be maximized through equal distribution of income.

Distribution (Cont…) But economists have not been able to offer an

acceptable or operational solution to the problem of optimal distribution of welfare.

Progressive income-taxes coupled with corporation taxes are considered to be powerful instruments for redistribution of income.

Distribution (Cont…)

Taxation policy and public expenditure policy are to be used simultaneously for bringing about an effective redistribution of income in a more equitable manner.

Progressive personal income-tax

Stabilization To stabilize the level of employment or income or price level or

balance of payments or all of these. Govt can use monetary policy or fiscal policy or both for

stabilization. Monetary policy directly affects the supply of money Fiscal policy affects the volume of total public expenditure

and total tax collections.

Business activity in an economy is usually characterized by fluctuations of a cyclical nature. A boom in the economy may burst and lead to a depression. While during boom, prices rise beyond the reach of common person, spelling misery.

Economic Development

Savings are crucial for furthering the process of economic development in its early stages.

It is on savings and investments that the development of an economy depends.

If the desired rate of economic development is to be achieved, it is necessary for the govt to have a check on savings and investments.

Economic growth is usually brought about by technological innovation.

Economic Development (cont..)

It is necessary for accelerating the rate of economic development that the volume of savings available for investment must be increased.

Guidelines for Public Expenditure

The primary aim of public expenditure should be to promote social welfare.

The benefits accruing(to increase over a period of time) from public expenditure on each public service or good should be more than the cost of providing that good or service.

High priority should be given to those items which result in promotion of maximum social welfare while low priority to those which lead to promotion of least social welfare.