Effects of Public Expenditure

 Public Expenditure has far reaching effects on production, employment and distribution in a country. Some of them are:-

(I) EFFECTS ON PRODUCTION

(A) On Social Insurance:- Public Expenditure on social insurance benefits tends to increase the purchasing power of workers indirectly. When these facilities are provided by the state, the workers are not required to spend on them, thereby increasing their purchasing power. The money so saved is used to increase their standard of living which in turn increases their efficiency and production.

(B) On Education and Public Health:- Public Expenditure on education and public health has direct welfare effects on society. Expenditure on education is regarded as investment in human capital because it helps in skill formation and thus raises the ability to work and produce more. Similarly, public health is also another form of investment in human capital. Healthy workers, who are free from diseases, work more and raise production.  

(C) On Basic Facilities:- Public Expenditure on basic facilities also tends to raise efficiency and ability to work. When the state provides such basic facilities as cheap ration, low-rent houses, mid-day meals to children, cheap milk, etc., the ability to save increases. This, in turn, tends to raise their ability to work, thereby increasing production.

(D) On Credit and Banking Facilities:- Public expenditure in providing credit and banking facilities also helps in increasing the productive capacity of the economy. It is through bank nationalisation and/or through state and co-operative banks and opening of a network of branches throughout the country that the state can provide cheap and better credit and banking facilities to agriculture, industry and trade, and thus help in increasing their productivity.

(E) In the form of Grants and Subsidies:- Public expenditure in the form of grants and subsidies to farmers, firms and industries is highly productive. When there is a bumper crop, the prices of farm products fall considerably. The state can save them from disaster through price support. It can purchase their surplus stocks at fixed minimum prices. In order to encourage higher production, the state can provide such inputs as fertilisers, seeds, pump sets etc., at subsidised prices. Similarly, the state can help develop industries by providing them subsidies. Some of the industries have high costs in the intial stage of production. As a result, the prices of their products are high and they are not in a position to compete in the market, and thus they meet an early death. To save such industries, public expenditure in the form of subsidies may enable them to develop without charging high prices from its customers.


(II) EFFECTS ON DIVERSION OF RESOURCES

(A) On Infrastructure:- Public expenditure on the development of roads and railways help in diverting resources to more productive uses when the market for products become larger. Again, public expenditure on generation of power supply and irrigation facilities helps in the diversion of resources to large industries and agriculture. Further, public expenditure on providing research, technical education, etc. tends to divert resources to more productive uses . When public expenditure is made on long-run infrastructural facilities resources are diverted from their present to future uses which are more productive.

(B) On Backward Areas:- Public expenditure on the development of backward regions or areas brings diversion of resources from more developed to less developed areas. Such diversion takes place when the government incurs more expenditure in the form of transport, power, and on the establishment of public enterprises in a backward region. Grants made by the government for the development of such areas help s in diverting natural and human resources from the developed to backward areas. 

(C) To Private Enterprises:- Public expenditure in the form of loans and subsidies to private enterprise helps in the diversion of resources into productive channels. Sometimes loans and subsidies are made conditional. They are dependent on the quality of the product. In such cases, diversion of resources leads to the production of better quality products as against inferior goods.

(D) On Defence:- Public expenditure on defence or war leads to the greatest diversion of resources. Such expenditure diverts resources from peaceful uses to war uses. It is normally regarded as the wastage of human and material resources which can otherwise be used for social benefits. But to defend a country is the foremost duty of the government. All expenditure on defence is not wasteful rather it is productive indirectly. 

(III) EFFECT ON INCOME DISTRIBUTION

(IV) EFFECT ON ECONOMIC DEVELOPMENT


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