Meaning, Definitions, Characteristics, Functions and Importance of Public expenditure accounting

15/07/2021 1 By indiafreenotes

Public expenditure is spending made by the government of a country on collective needs and wants such as pension, provisions (such as education, healthcare and housing), security, infrastructure, etc. Until the 19th century, public expenditure was limited as laissez faire philosophies believed that money left in private hands could bring better returns. In the 20th century, John Maynard Keynes argued the role of public expenditure in determining levels of income and distribution in the economy. Since then, government expenditures has shown an increasing trend. Sources of government revenue include taxes, and non-tax revenues.

In the 17th and the 18th centuries, public expenditure was considered a wastage of money. Thinkers believed government should stay with their traditional functions of spending on defense and maintaining law and order.

Public expenditure refers to expenditure of the government. In the past, the subject of public expenditure was neglected because the expenditure of the government was very small. There has been a persistent and continuous increase in public expenditures in countries all over the world. This tendency was observed in the 19th century itself but it has become clear and definite in the 20th century.

  1. Principle of Maximum Social Advantage

The objective behind this principle is that public money should be spent for general cause and must promote social welfare. It should not be spent for the benefit of a particular group of society. Public expenditure should result in increased production, elimination of inequality and promotion of welfare of all. It should secure internal peace and also protection from external aggression.

  1. Canon of Economy

The authorities are expected to follow utmost economy in its expenditure. Public money should not be misused and not result in any wastage. Whenever money is raised by taxation, public expenditure in return should bring maximum benefit. It should not produce unfavorable effect on production. Canon of economy does not mean niggardliness or miserliness. It simply means the prevention of extravagance and waste of all kinds.

  1. Canon of Sanction

Without the sanction of the public authority, no money should be spent. At the same time, the amount of money must be spent for the purpose for which it was sanctioned.

This will ensure that:

  • Waste and extravagance are avoided,
  • There is proper audit done compulsorily,
  • There is control and legislative supervision over public expenditure,
  • It is seen whether the expenditure has fulfilled the objective.

In the absence of proper sanction, there may be misuse and misappropriation of public funds. The Public Accounts Committee established by every legislature sees that these objectives are achieved.

  1. Canon of Elasticity

This implies that there should be scope for varying the expenditure according to need or circumstances. There should not be any rigidity in public expenditure.

  1. Canon of Surplus

To greater extent, the government expenditure should lead to increased production, employment and income. The expenditure should be with in the revenue of the State. Deficit is permitted only for a short duration. In times of crisis, government is allowed to have deficit budget. The deficit must be made good after the normalcy returns.

Finally, public expenditure should promote economic growth, stability and social justice. Public expenditure should be directed to achieve economic and social objectives of the country.

Effects of Public Expenditure

Public expenditure is beneficial since it influences the economy in many directions. The effects of public expenditure are always beneficial. It increases the capacity of the people to produce output efficiently. It influences the production not only directly but also indirectly. It increases the community’s productive power. It promotes social and economic equality and finally increases income, employment and welfare.

  1. Effects on production

Expenditure on defence becomes productive and it becomes a protective expenditure. Development of infrastructures facilitates production and thereby helps to increase national income and in turn per capita income. Expenditures on social services like free education, health and medical aid, which increase the capacity of the people to work and save and productive power.

  1. Effects on distribution

Public expenditure is an ideal medium to remove economic inequalities in society. The government should tax more the rich. The amount so collected should be spent on free education, medical aid, cheap food, subsidized houses, old age pension, etc. This process of public expenditure will bring about redistribution of national income in favour of the poor.

  1. Effects on income and employment

Public expenditure affects the level of income and employment in the country by removing the widespread unemployment. Investing more on public works like roads, hydro-electric generating works, etc. will create a multiplier effect on the economy and thereby increases the income and employment. This results in increased consumption and in turn develops the consumption goods industries and capital goods industries.

Public expenditure can be divided into COFOG (Classification of the Functions of Government) categories. Those categories are

  • Social protection: Pensions, subsidies for family and children, unemployment subsidies, R&D (Research and Development) on social protection.
  • Health: public health services, medical products, appliances and equipment, hospital services, R&D on healthcare.
  • General Public Services: Executive and legislative organs, financial and fiscal affairs, external affairs, foreign economic aid, public debt transactions, R&D related to general public services
  • Education: Pre-primary, primary, secondary, tertiary education, R&D on education etc.
  • Economic Affairs: General economic, agriculture, fuel and energy, commercial and labour affairs, forestry, fishing and hunting, mining, manufacturing, transport, communication etc.
  • Public order and safety – police, fire-protection services, law courts, prisons etc.
  • Defence: Military defence, civil defence, foreign military aid.
  • Recreation, culture and religion: Recreational and sporting services, cultural services, broadcasting and publishing services, religious services etc.
  • Environmental protection: Waste management, pollution abatement, protection of biodiversity and landscape etc.
  • Housing and community services: Housing development, community development, water supply, street lighting etc.

Principles Governing Public Expenditure

Rules or principles that govern the expenditure policy of the government are called canons of public expenditure. The following four canons of public expenditure:

  1. Canon of Benefit: Public spending must be done in a manner that it brings greatest social benefits.
  2. Canon of Economy: It says that economy does not mean miserliness. Public expenditure must be made productively and efficiently.
  3. Canon of Sanction: Public spending should not be made without sanction od an appropriate authority.
  4. Canon of Surplus: Public expenditure should be done in a way avoiding deficit. Government must prepare budget to create a surplus.