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Public expenditure exercises a far-reaching influence upon the national economy of a country. Its economic effects can be viewed from two points:

  • Effects of public expenditure on the level of national income.
  • Effects of public expenditure on the distribution of wealth in the country.

The above points about the effects of public expenditure on the volume of national income can be well explained below:

(1) Economic Effects of Public Expenditure on the Volume of National Income:

Public expenditure greatly helps in promoting and maintaining employment in the country because it forms a sizeable portion of the total expenditure of the community. If private consumption and investment expenditure is not sufficient in sustaining the national income at its highest level, the government comes forward and fills up the gap between actual spending and the full employment spending by arranging a series of public works programmes. Government expenditure directly or indirectly assists in developing the natural and human resources of the nation.

On the other hand, when due to excess increase in private and government consumption and investment expenditure, prices shoot up, the government gradually curtails its expenditure and thus drives of the inflationary spiral. In order to check excessive rise in prices, it also prepares surplus budgets. Public expenditure can also help in raising the level of employment. Government consumption and investment expenditure is utilized in such a way that the poorer section, of the community gets maximum benefit out of it. With the increased expenditure, the level of employment also increases.

(2) Effect of Public Expenditure on the Distribution of Wealth:

Public expenditure can greatly help in toning down the inequalities, of wealth distribution in the country. The government by taxing the rich people at progressive rates reduces their high income. The money, thus raised, is mostly spent for the benefit of the poor people. State provides free medical aid, free education, cheap housing, subsidizes necessaries of life, poor relief, unemployment benefit fund, etc. The provision of these social amenities makes a net addition to the income of the poor classes. The poor people gain at the cost of well-to-do grades of society. Public expenditure, thus, seeks to bridge the gulf between the rich and the poor.

When the government tries to makes the distribution of national income more even and fair by public expenditure, it should be very cautious in implementing such a policy. When the wealth is transferred to the poor by the provision of free goods and services, the state should see that it does not reduce desire to work and save of the rich people. Moreover, the rich people should not be burdened with heavy taxation. If they are taxed heavily, the accumulation of capital will be impeded. Thus the purpose of the state in toning down the inequalities of wealth distribution and bringing general welfare will not be served.