Lesson 1, Topic 1
In Progress

Government Expenditure


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Government expenditure refers to the purchase of goods and services, which include public consumption and public investment, and transfer payments consisting of income transfers (pensions, social benefits) and capital transfer.

What is the definition of government expenditures? A government spends money towards the supply of goods and services that are not provided by the private sector but are important for the nation’s welfare. Government spending goes to the nation’s defense, infrastructure, health and welfare benefits.

Furthermore, governments subsidize startup industries or industries that cannot propel their operations with funding by the private sector, such as transportation or agriculture. The transfer payments for pensions is not a flexible instrument of fiscal policy, while unemployment benefits depend on the cycle of the economy, i.e. recession or expansion. Conversely, income transfers to private firms in the form of financial and fiscal incentives reinforce investment activity and employment. In this sense, government spending enables the redistribution of income.

The expenditure to be used by a government for the sake of public welfare is known as government expenditure or public expenditure. Government performs varieties of function for the maintenance welfare functions. For such maintenance, government needs to spend money in different sectors. Such expenses incurred by the government are known as government expenditure.

TYPES OF GOVERNMENT EXPENDITURE

The government expenditure can be classified into the following types;

1.       CurrentExpenditure

It is a recurring expense. Such types of expenses are used in the terms of providing goods and services. It includes wage, salaries and so on. It is also called regular expenditure.

2.       CapitalExpenditure

It is the expenditure in the assets such as in the purchase of items that last for the long period. For example, building hospitals, constructing roads, etc.

3.       TransferPayments

A transfer payment is a payment done for no goods and services. It includes the things like pensions, allowance, benefits, lottery payments, etc.

4.       Repayment ofDebts

Government has to pay the principal and interest of the debt borrowed from the internal and external sources. In developing countries, a significant proportion of public expenditure goes to repayment of debts.

IMPORTANCE OF GOVERNMENT EXPENDITURE

The major importance of government expenditure are as follows:

1.       To maintain law andorder

Maintaining law and order is the main function of government. Without law and order, government are misplaced with their activities. To maintain the law and order, government needs a huge amount of budget every year.

2.       To invest on social and economicoverheads

For economical progress, firstly, there must be the development of socio-economic infrastructure like road, electricity, transportation, school, hospital, etc. It is possible with the public expenditure because to develop such infrastructures, there should be a huge amount of capital.

3.       Utilization of Naturalresources

Natural resources are the essential for the economic development of a country which needs a huge amount of capital. This is not possible by the private sector. So, public expenditure helps to explore and utilize the natural resources for the development of a country.

4.       Development of Agriculture and IndustrialSector

For the development of agricultural sector such as irrigation and power, seed farms, fertilizer factories, warehouses, etc. the government has to incur a lot of expenditure. To establish a larger industry, it requires a huge amount of capital. This is possible through government expenditure.

5.       Redistribution ofincome

Government expenditure provides subsides, free education and healthcare facilities to the poor people. So, government expenditure is used as a powerful fiscal instrument to bring about an equitable distribution of income and wealth.

6.       Provide administrativeservice

The government needs to allocate its budget to carry out administrative service of different agencies, department, ministries and concerned offices. The government provides various types of services to its citizens.

Ø  Classification of GovernmentExpenditure

Government expenditure can be classified under the budget document of the government. The budget document includes tax and tables about the tax and expenditure policies of the government. Theoretically, government expenditure can be classified under three methods. All three classifications are described below in brief:

  • Agencies/ObjectClassification
  • FunctionalClassification
  • EconomicClassification
·         Agencies/Object Classification

Such classification is found in the government’s budget document. Under the agencies classification, the total expenditure is classified by the spending agencies policies, such as personal services, travel, and transportation of goods, printing and policing, equipment and supplies. This classification tells little about the government activities and government policies.

·         FunctionalClassification

Functional classification of expenditure is based on various functions of the government. This has been used in Nepalese budget document. It is classified into two categories:

1. Regular or Administrative Expenditure

Such type of expenditure is related to day to day activities. It constitutes the expenditure made on the following government organization:

1.       ConstitutionalOrgans

It constitutes expenditures of the government on constitutional organs like Supreme court, Auditor General Office, Election Commission, public Service Commission, Attorney general Office, Council of Ministers and Parliamentary Secretariat.

2.       GeneralAdministration

It includes expenditure of Council of Ministers, Various Ministers, District Administration Office, Police Force, Jail Administration, etc.

3.       RevenueAdministration

It consists of expenditure made on a collection of land revenue, custom office, inland tax department etc.

4.       Economic Administration andPlanning

It consists the expenditure of the National Planning Commission, Central Bureau of Statistics and Department of Metric Measurement, etc.

5.       JudicialAdministration

It comprises the expenditure of Court and Judicial commission.

6.       Defense

It consists the expenditure on defense through national security organizations. The cost of the Nepal Army also comes under regular expenditure heading.

7.       SocialService

It includes the expenditure on education, drinking water, health local development and other social services.

8.       EconomicServices

It includes the expenditure on agriculture, irrigation, land reform, forest, industry, mining, communication, transport, electricity, etc.

9.       Loans andInvestment

It includes the expenditure on loans andinvestments.

10.   Loan Repayment andInterest

It includes expenditure on payment of principle and interest on loan borrowed from a different organization, like public organization, international organization, etc.

11.   Miscellaneous

It includes the expenditure on travelling expenses of dignitaries and government delegation, hospitality, pension, allowance, etc.

2. Development or Capital Expenditure

It is related to the expenditure on development activities of the government. It consists of the following heads:

1.       ConstitutionalOrgans

It includes the expenditure on infrastructure development of constitutional organs like Supreme Court, Election Commission, Public Service Commission, etc.

2.       GeneralAdministration

It includes expenditure on administration reform of government organizations such as police department.

3.       Economic Administration andPlanning

It includes the expenditure on planning and statistics of the nation.

4.       EconomicServices

It includes the expenditure on the development of agriculture, irrigation, land reform, forest, industry, mining and other economic services.

5.       SocialServices

It includes the expenditure on development of education, drinking water, health local development and other social services.

6.       Miscellaneous

It includes the expenditure in miscellaneous and contingency expenses of the nation.

·         EconomicClassification

Economic classification shows the economic character of expenditure. This classification distinguishes between:

  1. Current and capitalexpenditure
  2. Purchase of goods services and transferpayments
Current expenditure comprises the following items:
  • Consumptionexpenses
  • Office operation and servicesexpenses
  • Grant andsubsidies
  • Productionexpenses
  • Contingencyexpenses
  • Principlepayment
  • Interestpayment
  • Refunds
Capital Expenditure comprises the following items:
  • Capital transfer
  • Capital formation
  • Investment
  • Capital grants

ACTIVITY

  1. What is Government Expenditure? State the types of government expenditure.
  2. What are the importance of government expenditure?