Public Expenditure

Publisher Summary This chapter provides an account of the public finance in theory and in practice. It discusses fiscal policy, which embodies the government's decisions on the size, composition, and timing of public expenditure and revenue to achieve economic, social, and political aims. Public expenditure can be defined in different ways. The widest definition includes expenditure by: the central government, local authorities, and nationalized industries. The need for public expenditure arises out of the functions of the state. Certain functions are basic to any society. As it develops, the range of functions widens. Optimum level of public expenditure is at a point at which the benefits from additional expenditure equal the additional sacrifice of paying taxes to finance it. Theories of public expenditure seek to determine the desirable level of public expenditure: marginal utility theory, the ballot box theory, and the positive theory of government expenditure. Interpretation of the trends in public expenditure over time and international comparisons require care because there are statistical problems and problems of definition. Wagner's law and the displacement effect are two important observations on the growth of public expenditure. Reasons for the growth of public expenditure are economic, social, and political.