SINDAYIGAYA AIMABLE BENJAMIN

ECO2104: PUBLIC ECONOMICS

INTRODUCTION

In economics, the word public is generally used to refer to what belongs or related to the
country or the community as a whole. Then public economics refers to economic activities
related to government, public or community as a whole.
Therefore, Public economics is concerned with public expenditure, and public revenue

CHAPTER ONE: PUBLIC EXPENDITURE

1.0 Introduction
Public expenditure is commonly known as government expenditure and it refers to spending
made by the central government and local or regional governments in behalf of citizens and it
includes development expenditure and recurrent expenditure.
Therefore, it is any money that goes out of government coffers for various purposes.
1.1 Main types of government expenditure
As we have see in meaning of public expenditure, public expenditure or government expenditure
takes the following main forms:
Recurrent expenditure: This refers to expenses incurred by the government for the day
to day running of the state and providing public services. It is also called operating
expenditure. Examples of recurrent expenditure include salaries to civil servants, fuel,
drugs to government hospitals, and etc.
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 Development expenditure: This refers to expenditure that increases a countrys capital

stock. It is a set of expenses incurred by the government on durable assets that improve
the productive capacity of the citizens. Examples of development or capital public
expenditures are: construction of road, school, bridge, dams, water pumps, hydro
power centre, industries, and etc.
1.2 Major reasons for government expenditure
Generally we can identify the major objectives of government expenditure as below;
Providing public and merit goods: This means that public goods can only be paid by
the state since the individuals cannot provide or afford them. The examples of merit
goods are school, hospital, road, etc.
Redistribution of income and wealth: This means that the major aim of the government
expenditure is to redistribute income and to reduce income inequalities by providing a
basic minimum level of income for the unemployed, old, disabled, and other low-income
groups through different incentives.
Influencing resource allocation: This is achieved by reducing regional economic
imbalance through providing grants and subsidies to selected sectors, firms, regions and
service providers so as to influence their economic performance.
Influencing the level of macro-economic activity: Public spending play a big role to
influence the aggregate demand where BOP problems and others were solved.
Regulating economic activities: The government spends to make standards set and
enforceable.
1.3 Principles of public expenditure
Principles, guidelines or standards of public expenditure are those consideration kept in mind
when government is spending its resources in behalf of the community as a whole and they are
as follows;
The principle of economy: the public expenditure must be incurred to minimize the

wastage of public resources.

 The Principle of maximum social benefits: the majority of people must get maximum

benefits from government or public expenditure.

The principle of elasticity: The government expenditure should increase or decrease

depending on circumstances. In case of disaster the government expenditure increases

and after decreases during peaceful period.
The principle of Sanction: Government expenditure must be approved by a defined

authority like the parliament or any other policy making body before its implementation.
The principle of balanced budget: Every government must try to keep its budget well

balanced. Therefore, government spending should be in budget lines with aim of limiting
wastage of government resources.
The principle of avoidance for unhealthy effects on production or distribution: the

public spending should stimulate productive activity so as to improve level of

productivity within a state.
There must be sound financial administration: Public accounts must be maintained

accurately and must be audited periodically in order to iron out differences.

1.4 Advantages of public expenditure
The advantages of public expenditure are as follow:
It increases the production of goods and services when they are incurred on state owned
enterprises.
Through public expenditure, the government provides subsidies to the poor which will
improve on the distribution of income.
The government is able to ensure maximum welfare through spending on provision of
social services.
Public expenditure can be used to maintain economic stability of prices and other
economic variables; for example during deflation, public expenditure is increased and
decreased during inflationary period.

 Public expenditure can also be used to correct the balance of payment deficit. This can be
done by reducing expenditure on imports thereby improving on balance of payment
position of a country.
Public expenditure can be used to establish good relations with other countries for
example when the government spends on assistance to other countries.
1.5 Problems faced in effecting public expenditure.
The people who benefit more from public expenditure are different from those who
contribute to public or and it is difficult to balance the interest of this group.
There is a problem on balancing the regional allocation of public expenditure on public
goods like roads and hospitals.
There is a problem of insufficient funds to finance all the government expenditure since
policy makers face problems in allocating insufficient funds to ensure that all government
obligations are financed.
Public expenditure is often faced with a problem of embezzlement and mismanagement
hence failure to meet the desired government goals
There is a problem of abrupt expenditure by the government due to disasters so that the
government actual expenditure exceeds the anticipated expenditure.
Thereafter, public expenditure is financed by the following public revenue: taxation, fees, rates,
grants, gift, markets dues, fines and penalties, gifts, license fees and public borrowings,
profits from government parastatals (companies), compulsory savings and sale of
government assets and so on but our concern among these sources of revenue is taxation and
public debts as explained in details follow;