Assignment On Effects of public expenditure

Assignment
On
Effects of public expenditure

Submitted To:
Tazrina Floora
Lecturer
Stamford University Bangladesh.

Submitted By:
Name: Sadia Ahmed
ID No. BBA 042 13339

Date of Submission: 09/03/2013

Effects of public expenditure

The government economy is the part of the economy. Different sector of the economy are interdependent and influence each other, similarly, the government sector also is interlinked with rest of the economy. Government sector has the authority to bring certain changes in the economy. It is also an important means of directing the working of the rest of the economy. It is this intricate relationship between the government sector and the rest of economy which spells out different possible effects of public expenditure.

1. Public Expenditure Economic Stability

Economic stability refers to an economy that experiences constant growth and low inflation. Advantages of having economic stability include having increased productivity, improved efficiencies and low unemployment. Common signs of an unstable economy are extended time in a recession or crisis, rising inflation, and volatility in currency exchange rates. An unstable economy causes a decline in consumer confidence, stunted economic growth and reduced international investments.

Growth of international trade and commerce has allowed for the economic stability of one country to affect the stability of others. When a country’s economy becomes unstable, it will experience a large reduction in international investments and spending. Foreigners can also lose significant money if their investments are within a country with an unstable economy. For example, if an investor in France purchased real estate within the U.S. before the economic crisis of 2008, the value of the investment may have dropped to irrecoverable lows even after the U.S.’s recovery.

Economic instability takes the form of depression, recession and inflation. Public expenditure is used as a mechanism to control instability. The modern economist Keynes advocated public expenditure as a better device to raise effective demand & to get out of depression. Public expenditure is also useful in controlling inflation & deflation. Expansion of Public expenditure during deflation & reduction of public expenditure during inflation control money supply & bring price stability.

2.  Public Expenditure and Production
Public expenditure may be productive directly or indirectly. Governments, in every country, are running commercial enterprises which are directly productiveThe effect of public expenditure on production can be examined with reference to its effects on ability & willingness to work, save & invest and on diversion of resources.
Ability to work, save and invest : Socially desirable public expenditure increases community's productive capacity. Expenditure on education, health, communication, increases people's productivity at work and therefore their incomes. With rise in income savings also increase and this in turn has a beneficial effect on investment and capital formation.

Willingness to work, save and invest : Public expenditure, sometimes, brings adverse effects on people's willingness to work and save. Government expenditure on social security facilities may bring such unfavourable effects. For e.g. Government spends a considerable portion of its income towards provision of social security benefits such as unemployment allowances old age pension, insurance benefits, sickness benefit, medical benefit, etc. Such benefits reduce the desire to work. In other words they act as disincentive to work.

Effect on allocation of resources among different industries & trade : Many a times the government expenditure proves to be an effective instrument to encourage investment on a particular industry. For e.g. If government decides to promote exports, it provides benefits like subsidies, tax benefits to attract investment towards such industry. Similarly government can also promote a particular region by providing various incentives for those who make investment in that region.

3. Public Expenditure and Economic Growth
The goals of planning are effectively realised only through government expenditure. The government allocates funds for the growth of various sectors like agriculture, industry, transport, communications, education, energy, health, exports, imports, with a view to achieve impressive growth.
Government expenditure has been very helpful in maintaining balanced economic growth. Government takes keen interest to allocate more resources for development of backward regions. Such efforts reduces regional inequality and promotes balanced economic growth.

4. Public Expenditure and Distribution

The primary aim of the government is to maximise social benefit through public expenditure. The objective of maximum social welfare can be achieved only when the inequality of income is removed or minimised. Government expenditure is very useful to fulfill this goal. Government collects excess income of the rich through income tax and sales tax on luxuries. The funds thus mobilised are directed towards welfare programmes to promote the standard of poor and weaker section. Thus public expenditure helps to achieve the objective of equal distribution of income.
Expenditure on social security & subsidies to poor are aimed at increasing their real income & purchasing power. Public expenditure on education, communication, health has a positive impact on productivity of the weaker section of society, thereby increasing their income earning capacity.

Conclusion
Modern economies have all experienced tremendous growth in public expenditure. So it is absolutely necessary for governments to formulate rational public expenditure policies in order to achieve the desired effects on income, distribution, employment and growth.