Public finance - growth of public expenditure

1. Growth of Public Expenditure
Public expenditure has phenomenally increased all the world
over. The factors responsible for a large increase in public
expenditure over time in India are generally applicable to
other countries too. There are two laws about the growth of
public expenditure.
Wagner’s Law of Increasing State Activity:
According to Wagner, a German economist, there are inherent
tendencies for the activities of the Government to increase
both extensively and intensively.

2. •In other words, according to this law as an economy develops
over time, the activities or functions of the Government
increase.
•With the development of the economy, new functions and
activities are undertaken by the Government and old
functions are performed more thoroughly.
•The expansion in the Government functions and activities
leads to the increase in public expenditure.
•Though Wanger based his law on the historical evidence
drawn from economic growth of Germany, this applies equally
to other countries, both developed and developing ones.

3. •The traditional old functions are – defence, administration of
justice, maintenance of law and order and provision of social
and civic amenities.
•New functions are – expenditure on social infrastructure, old
age pension, employment allowance health insurance etc. and
provision of public and merit goods.
•Criticism of Wagner’s law
1. Limited applicability
2. Normative theory
3. Neglects impact of war expenditure
4. Simplification of role of State

4. Wiseman-Peacock Hypothesis:
•This hypothesis about the growth of public expenditure has been put
forward by Wiseman and Peacock in their study of public expenditure
of U.K.
•According to this Wiseman-Peacock hypothesis, Government
expenditure does not increase at a steady rate continuously but in jerks
and step-like manner.
•However, in the view of the present author, both these factors, one
making for a continuous increase in Government activity and
consequently public expenditure as emphasized by Wagner and others
like war and depression causing the public expenditure to rise by jerks
as emphasized by Wiseman and Peacock have been responsible for the
enormous increase in public expenditure.

5. The factors responsible for growth in public expenditure with
special reference to the Indian economy are -
1. Defence:
An important factor responsible for public expenditure is the
mounting defence expenditure incurred by countries all the
world over. It is not only during actual wars that defence
expenditure has been rising but even during peace time, the
countries have to remain in the state of military preparedness
demanding large defence expenditure.

6. There is arms race going on between countries. A poor
country like India has to safeguard its hard earned freedom
and this involves a lot of expenditure on building up efficient
and adequate armed forces. India is wedged in between two
enemies, namely, expansionist China and aggressive Pakistan,
which have been strengthening their armed forces.
India had to fight three wars since independence. India has
thus to remain in a state of military preparedness. Internally
also in view of clash of linguistic, territorial and political
interests, lot of expenditure has to be incurred on maintaining
internal security.

7. 2. Population Growth and Urbanisation:
Population has been increasing in almost all countries of the
world, though at varying rates.
In India the population has been increasing at an alarming rate
since independence. The scale of government activities such
as providing education, public health, roads and transport
facilities has to increase in harmony with the growth of
population. Further, when population increases, more has to
be spent on administrative services (police, jails, judiciary etc.)
to maintain law and order in the country.

8. With the progress of the economy and the growth of
population, the extent of urbanisation increases. As a result of
the increasing urbanisation, the existing towns expand and
the new ones come up. Urbanisation calls for greater per
capita expenditure on social and administrative services.
Therefore, the increase in urbanisation in India has tended to
increase the government expenditure.
3. Activities of a Welfare State:
The Government activities and functions have been increasing
due to the change in the nature of State. The modern States

9. are no longer Police States concerned mainly with the
maintenance of law and order. They have now become
Welfare States.
A Welfare State is one which provides for social insurance of
its citizens against old age, sickness, unemployment etc. The
modern Governments have therefore to incur a lot of
expenditure on social security measures such as old age
pensions, unemployment allowances, sickness benefits.
4. Maintaining Economic Stability:
• As pointed out by Wagner, state functions increase with the
advancement and progress of the economy. In the

10. nineteenth and early twentieth century, the Government
followed laissez-fair policy. Now, need for active intervention
of the Government has been increasingly felt.
According to his theory, lapses from full employment or
depressions are caused by deficiency of aggregate demand
due to the slackened private investment activity.
In order to compensate for this shortfall in private investment,
the Government has to step up its expenditure on public
works. The increase in Government expenditure raises
aggregate demand manifold through the working of what
Keynes has called income multiplier.

11. This helps to push the economy out of depression and to raise
levels of income and employment. Now, this compensatory
fiscal policy is being followed by all the world over, since
achievement of full employment and maintenance of
economic stability has become an important objective of the
Government.
It is in line with the objective of employment that in India, the
Government has taken over several private sick mills and
incurs a lot of expenditure on them so that workers employed
in them are not rendered unemployed.

12. Further, the Indian Government, both Central and States,
incur a lot of expenditure on relief public works in rural areas
when drought and other natural calamities occurs. Besides, a
lot of public expenditure is being incurred on special
employment schemes to promote employment in the
economy.
5. Economic Growth and Development:
The most important factor in developing countries has led to a
phenomenal increase in public expenditure is the expansion in
developmental activities of the Government. In countries like

13. India public sector plays an important role in promoting
economic growth and development.
Not only public utility services such as water supply,
electricity, post and petroleum and transport services have
been undertaken by the public sector, but also the
Government has invested a huge sum of resources in
industrial and agricultural development of the economy.
Several steel plants, multipurpose irrigation projects, fertilizer
factories, coal mining, exploration and production of oil and
petroleum, different kinds of machine-making industries and

14. chemical plants have been started and are being operated in
the public sector.
On these a huge amount of expenditure is being incurred by
the Government in India. Owing to these developmental
activities of the Government in India, the proportion of
developmental expenditure to the total Government
expenditure has greatly increased.
6. Mounting Debt Service Charges:
The Governments in all developing countries (including India)
has been borrowing heavily in recent years to finance their

15. increasing activities. Not only the debt money has to be paid
back when it matures, interest payments have also to be
made annually to the creditors.
These debt service charges have resulted in enormous
increase in public expenditure. The Government in India has
not only been borrowing from within the country but also
from abroad through foreign aid or commercial loans from
private capital markets to finance her development plans.

16. 7. Mounting Expenditure on Subsidies:
Governments, both in the developed and developing
countries, incur a lot of expenditure on subsidies to the
various sections of population. In India, the Government has
been providing subsidies on food, fertilizers, exports and
education, and expenditure on them has been increasing at a
rapid rate which is the main cause of large fiscal deficit in
India.
The expenditure of Central Government’s expenditure on
subsidies on food, fertilizers, exports now account for about 7
per cent of budget expenditure. While the aim of giving food

17. subsidy is to help the people below the poverty line, the aim
of fertilizer subsidy is to promote the growth of agriculture
and help small farmers.
8. Anti-Poverty Schemes:
Another important cause of increasing public expenditure in
India is huge expenditure which the Government is incurring
on employment generating anti- poverty schemes. It has now
been realised that economic growth alone will not eradicate
poverty, at least in the short run. Therefore, various
employment schemes have been started by the Government
for the people living below the poverty line.

18. Prominent among these anti-poverty schemes in India are
Jawahar Rozgar Yojna, Prime Minister’s Employment Scheme
and Integrated Rural Development Scheme (IRDP).
Expenditure on these schemes has greatly risen in recent
years.
Peacock Wiseman Hypothesis focused on the pattern of public
expenditure and stated that public expenditure does not
follow a smooth or continuous trend but the increase in public
expenditure takes place in jerks They gave three separate
concepts to justify the hypotheses they are.

19. 1. Displacement Effect
2. Inspection Effect
3. Concentration Effect
4. Displacement Effect
When a social disturbance occurs, the government raises taxes
to increase revenue and increases public expenditure to meet
the social disturbance. This creates a displacement effect by
which low taxes and expenditures are replaced by higher taxes
and expenditure levels. However, after the disturbance ends,
the newly emerged level of tax tolerance makes the people

20. willing to support higher level of public expenditure since it is
capable of bearing heavier tax burden than before. As a result,
the new level of public expenditure and public revenue
stabilize but are soon destabilize by another new disturbance
which causes another displacement effect.
2. Inspection Effect
Even if there is no new disturbance there is no strong
motivation to return to lower level of taxation as the
increased revenue can be used to support a higher level of
public expenditure. Therefore Government expands its fiscal
operations partly due to disturbance and partly to expand

21. economic activity and take up new functions that were earlier
neglected. This is known as inspection effect.
3. Concentration Effect
When an economy is experiencing economic growth there is a
tendency of central government’s economic activities to grow
at a faster rate than that of state and local government’s
activities. This is known as concentration effect. It is related to
the political setup of the country.