This article throws light upon the sixteen main factors responsible for the growth of public expenditure. Some of the factors are: 1. The New Concept of Welfare State 2. War and National Defence 3. Population Growth 4. Growth of Democratic Institutions 5. Provision of Economic Over Head 6. The Problem of Urbanization 7. Rising Trend in Price Level 8. Adoption of Planning and Others.
Factor # 1. The New Concept of Welfare State:
The 19th century state was mainly and basically a ‘police state’ primarily interested in the protection of the citizens from foreign aggression and in maintaining law and order within the country.
Modern states are not police states, but welfare states. The belief of the classical economists, in the efficacy of Laissez-fair capitalism in maintaining full employment and economic stability has been falsified.
On the other hand, Keynes and his followers with their penetrating analysis has shown beyond any shadow of doubt that the state must intervene in the economic system to secure economic stability in the developed countries and to achieve accelerated growth with stability in under developed countries. This led to the adoption of a welfare state concept by the Nations of the world.
The main objective of the welfare state is to promote the economic, political and social well-being of citizens. Modern governments spend huge amounts on generation of employment, provision of basic service like educational facility.
Health care facilities, social security measures, low cost housing to the poor, protection of environment etc. These welfare functions require enormous spending on the part of the government. This substantially contributed towards increasing the volume of public expenditure over years.
Factor # 2. War and National Defence:
In most countries the heaviest increase in public expenditure has been on account of cost of war and preparedness for war. The larger the country, the greater the percentage of resources allocated to national defence.
War and rumors of war between countries have forced them to be armed at all time and to get prepared to face a war situation. The cost of defence has phenomenally increased overtime, due to the use of new and sophisticated equipment’s. The progresses of military arts and sciences have been so rapid that the war equipment’s became extremely expensive and complex.
The progress in modernization of warfare and advancement in military arts and sciences make the machines of war quickly out-dated and necessitate speedy and costly replacement. With the emergence of electronic and nuclear warfare, the nature and dimensions of war technology became much costly.
Coupled with this, the provision of better living condition for defence personal, provision of pension and other social security measures, interest on war debt etc. positively helped to push the defence expenditure of almost all countries.
Large amount of public expenditure is usually set apart for the defence forces and local security forces like police, Territorial Army and border security force, in the state of India.
Factor # 3. Population Growth:
Another important factor responsible for increase in public expenditure is the growth of population. Population growth and the consequent concentration of people in towns have necessitated increased levels of many governmental activities.
Along with growth in numbers, the responsibilities of government relating to the provision of basic services have increased considerably. The state will have to bear additional responsibility of solving problems like food, unemployment, housing, sanitation, street lighting, drinking water, drainage etc.
Moreover, modern society is becoming complex with increasing needs such as higher levels of education, growth of network of roads and railways and other transport system and provision of public welfare. To check the growth of population, again the government has to increase large amount for family planning and welfare programmes.
Factor # 4. Growth of Democratic Institutions:
Today almost majority of nations have accepted the principle of democracy. Democratic institutions exert structural compulsions on public expenditure. The growth of democracy in the political system of any country requires maintenance of political institutions like periodic elections, at different layers of government, the legislatures, advisory council, local boards etc. and other grass root level administrative units.
Democracy also requires formation of public opinion. A modern democratic state has to maintain the ceremonial head of the state. Besides they had to maintain diplomatic and consular relations with all parts of the world.
Many countries are members of international organizations like the U.N.O, I.M.F, World Bank, W.T.O etc. This means besides annual subscription, expenses on permanent delegates, annual conference and other committed expenditures.
A modern government thus has been compelled by the democratic forces to assume more and more functions. Under the shadow of democracy, state activities have expanded and the functions of government have increased both intensively and extensively. The government expenditure on account of these institutions and activities has been on a continuous rise.
Factor # 5. Provision of Economic Over Head:
For the development of a nation, creation and maintenance of economic overhead facilities is imperative. Provision of these facilities like well-developed transport and communication, generation of electric power etc. requires heavy capital investment.
Since these investments are not highly profit induced, the private sector will be shy to invest in these areas. Hence government has to assume these responsibilities, to fulfill the basic requirements of development. Hence public expenditure on account of economic infrastructure is huge in size in developing countries.
Factor # 6. The Problem of Urbanization:
Population explosion leads to urbanization and resulted in the growth of metropolitan centers throughout the world. Urbanization is creating major hurdles to the all-round development of the economic system. Urban settlements are creating a number of socio-economic problems to the state, which need huge investment by the central, state and municipal bodies to address these problems.
The size of cities is becoming larger and larger, while newer urban habitations are springing up. The thickly populated urban centers have necessitated the governments to initiate immediate steps to overcome some of the major problems associated with education, public health, water supply, pollution, environmental hazards, energy crisis, drainage and sanitation, migration of rural people to cities etc. urbanization also leads to concentration of industries in urban centers with all attended evils.
All these activities associated with rapid urbanization increases the responsibility of state to provide huge public expenditure for taking care of the problem of urban inhabitants. Urbanization necessitates a much larger per capita expenditure on civic amenities of life.
Factor # 7. Rising Trend in Price Level:
Another factor pushing public expenditure ahead, at present, is the inflationary trend in price level. Rise in price level affect government expenditure in two ways.
Firstly as a purchaser, the government has to pay higher prices for all goods and services it purchases.
Secondly government, which is the single largest provider of employment, has to find out larger financial resources to meet its inflated administrative expenditure. That is when prices rise, the salary and allowances of government employees and other expenditures also increases correspondingly.
Factor # 8. Adoption of Planning:
Almost all countries have now basically accepted the principle of planned economic development. Economic planning is considered as a panacea for all economic evils like poverty, deprivation, unemployment etc. planning is considered as an instrument to achieve certain socio-economic objectives.
Planned economic development involves increasing state activities in many spheres of socio-economic life of the community.
Eradication of poverty, equitable distribution of income and wealth, provision of increased employment opportunities, development of backward classes etc. are the major objectives of planned economic development. This require large sum of money leading to a consistent increase in public expenditure.
Factor # 9. Education and Human Capital Formation:
The overall development of a country depends on the quality of human capital. In developing countries, responsibilities of human capital formation are primarily on the government. This is due to the widespread poverty of the people.
The government provides educational services, both general and technical and training of manpower. These facilities are provided either free of charge or at subsidized rate.
The development of trade and industry, necessitate specialization in different fields of technology and business administration. Government also launched programmes to eradicate illiteracy. Large amounts of grants of varying type are given to educational institutions at different levels.
Coupled with this the massive investments in the field of science and technology, to cope with the advancement in the field also pushed up government spending. The net result is a substantial increase in public expenditure at different layers of government.
Factor # 10. Modernization of Agriculture:
Most of the developing countries are basically agrarian economics. Growth of agriculture is necessary, not only to achieve self-sufficiency in food production, but also to provide adequate support to agro-based industries by providing required raw-materials.
The governments of most of these economics have realized the interdependence of agriculture and industry. The expansion of agricultural sector provides impetus to industrialization by supplying raw-materials and wage goods to industrial sectors. Increased income to farmers creates demand for industrial goods.
Likewise industrial sector supplies various inputs and implements to agriculture. Hence a systematic development of the agrarian sector is a vital need for the rapid economic development of a country.
So modern government undertake ambitious programmes for the modernization of agricultural sector. Hence in order to modernize agriculture, the government has to undertake expensive programmes for improving irrigation facilities, providing flood control methods, provision of fertilizer and other scientific agricultural inputs.
Apart from this huge investment are done in research and soil conservation, land reforms, subsidy to small and marginal farmers, export promotion activities etc… All these modernization programmes involves huge public expenditure.
Factor # 11. Industrial Development:
Industrialization leads to increase in national income and promotes the standard of living of the people. However for rapid industrialization, the involvement of the public sector is crucial. To industrialize the country the government has to develop basic and key industries.
Government also offers various incentives and concessions to private sector to attract industries in backward regions, and to ensure dispersal of industries in backward regions, to keep balanced regional development.
The incentives are provided in the form of establishment of industrial estates, provision of cheap credit, subsidized raw materials, tax holidays and concessions, improved transport system and marketing facilities. Further government takes measures to control monopolies and to provide consumer goods and services at reduced price. All these resulted in an increase in public expenditure.
Factor # 12. Provision of Public Goods and Utility Services:
Public goods are those, the consumption of which is externalized. It is consumed equally by all. These goods have no private market. Defence, and police service, justice, roads, irrigation, flood control projects, public parks etc. are all examples of public goods.
They involve huge investments and have to be provided by the government Moreover the provision of major public utilities like railways, post and telegraph, electricity services etc. are coming under government sector. The provision and maintenance of these public goods and general utility services involve heavy expenditure.
Factor # 13. Servicing of Public Debt:
Public debt constitutes a substantial part of the government revenue; a major part of mounting government expenditure is met from public borrowing.
Hence the internal and external debt obligation of the government has increased considerably during the last few decades. This leads to a subsequent increase in public expenditure in the form of increasing cost of debt servicing and repayment of loans.
Factor # 14. Protection from the Maladies of Market Mechanism:
In all welfare states, government is the ultimate custodian of public welfare. It is bound to keep a constant vigil on the abuses of free market mechanism like malpractices by dishonest traders, black marketing, hoarding, monopoly practices and consumer exploitation.
Modem governments consider it a part of its duty to protect the economy from the failures of market mechanism. Government adopts regulatory measures to check the imperfections in-the market system.
Government usually makes arrangements for buffer stock creation, and distribution of essential goods at reduced rates through a network of public distribution system. Government makes earnest efforts to reduce the income and wealth inequalities and to achieve social and economic justice. This necessary involves huge government expenditure through budgetary provisions.
Factor # 15. Economic Depression:
The worldwide depression of 1930’s stressed the need for using public expenditure as a compensatory factor to overcome the deficiencies in trade and employment caused by reduced private investment. Public expenditure has been found as the best anti-dot to fight against and for preventing economic depressions.
The government is expected to play an active role in maintaining the level of trade and employment.
Depression of 1930 s proved that state has an active part to play, by making a judicious planning of public expenditure in advance, to mitigate the impact of depression in trade. Government expenditure on public works and other projects directly provides employment to large numbers and by increasing the effective demand for goods and services helps to raise the level of business activity.
Government expenditure was considered as compensatory factors in maintaining the level of trade and employment especially during economic depression. This led to an increase in public expenditure after the world wide depression of 1930’s.
Factor # 16. Maintenance of Law and Order:
In tune with the growth of population urbanization and complexities of modern economic and socio-political life, law and order problem became more complex. Terrorism has become an international and national phenomenon threatening the law and order situations of nations across the world.
The responsibilities of the government, to protect the people from internal conflict and breach of peace by antisocial elements have now become a crucial component of government activity. This requires large amount of funds for maintaining the law and order machinery in constant vigil with full preparedness to meet any adversities.
Apart from these the maintenance and preservation of historical places, monuments and forest resources, populist policies adopted by the ruling parties under pressure from democratic institutions and opinions and lethargy of the bureaucracy also contribute towards increasing the nature and volume of public expenditure in recent years.