Government spending or expenditure includes all government consumption, investment, and transfer payments. In national income accounting, the acquisition by governments of goods and services for current use, to directly satisfy the individual or collective needs of the community, is classed as government final consumption expenditure. Government acquisition of goods and services intended to create future benefits, such as infrastructure investment or research spending, is classed as government investment (government gross capital formation). These two types of government spending, on final consumption and on gross capital formation, together constitute one of the major components of gross domestic product.
Government spending can be financed by government borrowing, taxes, custom duties, the sale or lease of natural resources, and various fees like national park entry fees or licensing fees. When Governments choose to borrow money, they have to pay interest on the money borrowed. Changes in government spending is a major component of fiscal policy used to stabilize the macroeconomic business cycle.
Public expenditure is spending made by the government of a country on collective or individual needs and wants of public goods and public services, such as pension, healthcare, security, education subsidies, emergency services, infrastructure, etc. Until the 19th century, public expenditure was limited due to laissez faire philosophies. In the 20th century, John Maynard Keynes argued that the role of public expenditure was pivotal in determining levels of income and distribution in the economy. Public expenditure plays an important role in the economy as it establishes fiscal policy and provides public goods and services for households and firms.
Theories of public expenditure
Several theories of taxation exist in public economics. Governments at all levels (national, regional and local) need to raise revenue from a variety of sources to finance public-sector expenditures. The details of taxation are guided by two principles: who will benefit, and who can pay. Public expenditure means the expenditure on the developmental and non-developmental activity such as construction of roadways and dams, and other activity.
Rules or principles that govern the expenditure policy of the government are called "canons of public expenditure". Economist George Findlay Shirras laid down the following four canons of public expenditure:
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.
Three other canons are: Canon of elasticity- it says there should be enough scope in expenditure policy.government should be able to increase or decrease it according to the period. Canon of productivity- public expenditure should encourage production efficiency of the economy. Canon of equitable distribution - expenditure policy should minimize inequalities and it should be designed in a way to benefit poorer sections.
Principle of maximum social advantage
The criteria and pre-conditions for arriving at this solution are collectively referred to as the principle of maximum social advantage. Taxation (government revenue) and government expenditure are the two tools. Neither of excess is good for the society, it has to be balanced to achieve maximum social benefit. Dalton called this principle as “Maximum Social Advantage” and Pigou termed it as “Maximum Aggregate Welfare”.
Dalton’s Principle of Maximum Social Advantage – maximum satisfaction should be yield by striking a balance between public revenue and expenditure by the government. Economic welfare is achieved when marginal utility of expenditure = marginal disutility of taxation. He explains this principle with reference to
Maximum Social Benefit (MSB) Maximum Social Sacrifice (MSS)
It was introduced by Swedish Economist “Erik Lindahl in 1919”. According to his theory, determination of public expenditure and taxation will happen on the basis of public preferences which they will reveal themselves. Cost of supplying a good will be taken up by the people. The tax that they will pay will be revealed by them according to their capacities.