presentation of public expenditure and public debt MA. Economics (semester 1) public economics

1. PUBLIC ECONOMICS
UNIT:- 3
Public Expenditure and Public Debt
• NISHALI B.
• PRIYA R.
• PAVITHRA R.
• FATHIMA FASHIHA M.F.
• PRIYANGA B.
• SONIYA B

2. Public Expenditure
● Public Expenditure refers to Government Expenditure.
● It is incurred by Central and State Governments.
● The Public Expenditure is incurred on various activities
for the welfare of the people and also for the economic
development, especially in developing countries.
● In other words “The Expenditure incurred by Public
authorities like Central, State and local governments to
satisfy the collective social wants of the people is known
as public expenditure.”

3. Importances of Public Expenditure
1. To promote rapid economic development.
2. To promote trade and commerce.
3. To promote rural development
4. To promote balanced regional growth
5. To develop agricultural and industrial sectors
6. To build socio-economic overheads eg. roadways, railways, power etc.
7. To exploit and develop mineral resources like coal and oil.
8. To provide collective wants and maximise social welfare.
9. To promote full – employment and maintain price stability.
10.To ensure an equitable distribution of income.

4. Objectives of Public Expenditure
1. Administration of law and order and justice.
2. Maintenance of police force.
3. Maintenance of army and provision for defence goods.
4. Maintenance of diplomats in foreign countries.
5. Public Administration.
6. Servicing of public debt.
7. Development of industries.
8. Development of transport and communication.
9. Provision for public health.
10.Creation of social goods.

5. Similarities between Public and Private Expenditure
Similarities
Same Welfare Objective
Rationality
Scarcity of Resources
Loans are Repayable

6. Difference between Public and Private Expenditure

7. Classification of Public Expenditure
Public Expenditure
Revenue
Expenditure
Capital
Expenditure
Development
Expenditure
Non-
Development
Expenditure

8. Reasons for Growth of Public Expenditure
1. The New Concept of Welfare State
2. War and National Defence
3. Population Growth
4. Growth of Democratic Institutions
5. Provision of Economic Overhead
6. The Problem of Urbanization:
7. Rising Trend in Price Level
8. Adoption of Planning
9. Education and Human Capital Formation
10.Modernization of Agriculture
11.Industrial Development
12.Provision of Public Goods and Utility Services
13.Servicing of Public Debt
14.Protection from the Maladies of Market Mechanism
15.Economic Depression
16.Maintenance of Law and Order

9. Canons of Public Expenditure
● CANONS OF MAXIMUM SOCIAL BENEFIT.
● CANONS OF ECONOMY.
● CANONS OF SANCTION.
● CANONS OF SURPLUS OR BALANCED BUDGET.
● CANONS OF FLEXIBILITY OR ELASTICITY.

10. Wagner's Hypothesis Of Public Expenditure
► Introduced by Adolf Wagner – German
political economist (1835-1917)
► He propounded an empirical law to analyses
and explains the trend in the growth of
public expenditure.
► Wagner hypothesized a functional
relationship between industrialization and
the relative importance of public sector
activity.
► Wagner’s Law of Increasing State Activity.

11. Wagner's present his law in below mentioned words
► Intensive increase means expansion of traditional functions of
the State on large scale.
► Extensive increase means relates to coverage of new welfare
functions.

12. Public Expenditure
Continuous Increases Due To
3 Reasons
• Expansion of traditional
functions
• Coverage of new functions
• Expanding sphere of public
goods
Factors Affecting Public
Expenditure Activities
► Both demand side and supply
side of public expenditure
activities.
► Demand side of public
expenditure activities.
► Supply side of public
expenditure activities.
Wagner believed that public expenditure will increase faster that the
increase in per capita income of people.

13. Formulation of Wagner's Law
is that
" As per capita income rises
in industrializing nations
their public sector will grow
in relative importance."
Criticisms of Wagner's Hypothesis
► Lacks interdisciplinary approach
► Lacks comprehensiveness
► Ignores the influence of war
► Stresses a long term trend of public economic activity

14. Peacock and Wiseman Hypothesis
► This hypothesis regarding the growth
of public expenditure was put forth
by Peacock and Wiseman, in their
empirical study of public expenditure
in U.K. for the period 1890-1955.
► Peacock and Wiseman emphasize the
time pattern of public spending trends
rather than striving for a genuine
positive theory of public sector
growth.
► Their analysis involves three related
elements.
► These are displacement, inspection
and concentration effects.

15. Displacement Effect
The figure reveals that as the social
disturbance cause a relative expansion of the
public sector, the displacement effect which
occurs helps to explain the time pattern by
which the government growth takes place.
Inspection Effect
Inspection effect is the inadequacy of revenue in comparison with the
‘required’ public expenditure.
Concentration Effect
It refers to the apparent tendency for the central government
economic activity to become an increasing proportion of total public
sector economic activity, when a society is experiencing economic
growth.

16. Samuelson and Musgrave Approach
● The theory of optimal public expenditure developed by
samuelson is a cornstone of public economics.
● Stimulus spending required to fill the output gap.
● In the traditional approach to taxation, the government
uses a linear income tax to finance public expenditure.
● However, the many areas of public expenditure call for
the prioritizing of expenditure on growth enhancing
sectors of the economy of which infrastructure are of
utmost necessity.

17. COLIN CLARK HYPOTHESIS
● This hypothesis tells the optimum level of public
expenditure.
● This hypothesis concerns with the tolerance level of
taxation.
● If government expenditure is more than 25%, then it will
lead to inflation. So critical limit of government
activity/share is 25%.
● Public expenditure beyond this limit means disincentive to
producer and fall in production due to taxation beyond
tolerance level.

18. Public Debt
● Public debt refers to borrowing by a government from
within the country or from abroad, from private
individuals or association of individuals or from banking
and NBFIs
● Public debt is the total amount borrowed by the
government of a country.
● In the Indian context, public debt includes the total
liabilities of the Union government that have to be paid
from the Consolidated Fund of India.
● Sometimes, the term is also used to refer to the overall
liabilities of the central and state governments.

19. Causes of Public Debt
1. War or war-preparedness, including nuclear
programmes
2.To cover the budget deficits on current account
3.To undertake public welfare schemes
4. Urge for economic growth
5. Inefficiencies of public organisations and corruption

20. Classification of Public Debt Source of Public Debt
● Internal and External Debt
● Productive and Unproductive
Debt
● Short-term and Long - term
Debt
● Redeemable and Non-
Redeemable Debt
● Funded Debt and Floating or
Unfunded Debt
● Marketable and Non-
Marketable Debt
● Voluntary and Compulsory Debt
● Gross and Net Debt
Internal Source
● Individual and Private
Organisations
● Financial Institutions
● Commercial Banks
● Central Bank
External Source
● Foreign Organisations
● International Financial
Institutions
● Foreigners

21. Debt Burden
Debt burden is the cost of servicing debt. For consumers, it is the cost of
interest payments on debt. The debt burden will be higher for credit
cards and loans with high interest. The debt burden on mortgages will be
relatively lower compared to the value of the loan.
Burden of Internal Debt Burden of External Debt
● Direct real burden ● Direct money burden
● Indirect money burden
Measurement

22. REDEMPTION OF PUBLIC DEBT
● Redemption of debt refers to the
repayment of a public loan although
pubic debt should be paid,debt
redemption is desirable too.
● In order to save the government from
bankruptcy and to raise the
confidence of lenders,the government
has to redeem its debt from time to
time.

23. References
Books:-
● Public Finance in Theory and Practice - R.A. Musgrave and P.B. Musgrave
● Public Finance and Public Policy - Arye
Websites:-
● www.askanydifference.com
● www.accountingnotes.net
● www.financialexpress.com
● www.sites.google.com
● www.edurev.in
● www.economicsdiscussion.net
● www.toppr.com
Youtube Links:-
● www.youtube.com/watch?v=kVl8x92fj24
● www.youtube.com/watch?v=ypzITn084Us

24. THANK YOU ☺️