Public expenditure exercises a far-reaching influence upon the national
economy of a country. Its economic effects can be viewed from two points: (i)
effects of public expenditure on the level of national income and (ii) effects
of public expenditure on the distribution of wealth in the country. We first of
all discuss the effects of public expenditure on the volume of
National Income.
(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 sizable 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 Distribution:
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.
