The top 7 Classification of Public Expenditure
Classification of Public expenditure refers to the systematic arrangement of different items on which the government incurs expenditure. Different economists have looked at the public expenditure from a different point of view.
The following classification is based on these different views.
Revenue expenditure is current or consumption expenditures incurred on civil administration, defense forces, public health and education, maintenance of government machinery. This type of expenditure is of the recurring type which is incurred year after year.
On the other hand, capital expenditures are incurred on building durable assets, like highways, multipurpose dams, irrigation projects, buying machinery and equipment. They are nonrecurring type of expenditures in the form of capital investments. Such expenditures are expected to improve the productive capacity of the economy.
A.C. Pigou, the British economist has classified public expenditure as:
Transfer Expenditure:
Transfer expenditure relates to the expenditure against which there is no corresponding return.
Such expenditure includes public expenditure on:
By incurring such expenditure, the government does not get anything in return, but it adds to the welfare of the people, especially belong to the weaker sections of the society. Such expenditure basically results in redistribution of money incomes within the society.
Non-Transfer Expenditure:
The non-transfer expenditure relates to expenditure which results in the creation of income or output. The non-transfer expenditure includes development as well as a non-development expenditure that results in the creation of output directly or indirectly.
This classification was made by Classical economists on the basis of the creation of productive capacity.
Productive Expenditure:
Expenditure on infrastructure development, public enterprises or development of agriculture increase productive capacity in the economy and bring income to the government. Thus they are classified as a productive expenditure.
Unproductive Expenditure:
Expenditures in the nature of consumption such as defense, interest payments, expenditure on law and order, public administration, do not create any productive asset which can bring income or returns to the government. Such expenses are classified as unproductive expenditures.
Development and Non-Development Expenditure:
Modern economists have modified this classification into the distinction between development and non-development expenditures.
Development Expenditure:
All expenditures that promote economic growth and development are termed as development expenditure. These are the same as a productive expenditure.
Non-Development Expenditure:
Unproductive expenditures are termed as non development expenditures.
Some economists classify public expenditure on the basis of functions for which they are incurred. The government performs various functions like defense, social welfare, agriculture, infrastructure, and industrial development. The expenditure incurred on such functions fall under this classification. These functions are further divided into subsidiary functions. This kind of classification provides a clear idea of how public funds are spent.
This classification has been suggested by economist Hugh Dalton.
Grants:
Grants are those payments made by a public authority for which there may not be any quid-pro-quo, i.e., there will be no receipt of goods or services. For example, old age pension, unemployment benefits, subsidies, social insurance, etc. Grants are transferred expenditures.
Purchase prices:
Purchase prices are expenditures for which the government receives goods and services in return. For example, salaries and wages to government employees and purchase of consumption and capital goods.
Hugh Dalton has classified public expenditure as follows:
Public expenditure can be classified on the basis of benefits they confer on different groups of people.
The following classification is based on these different views.
Revenue and Capital Expenditure:
Revenue expenditure is current or consumption expenditures incurred on civil administration, defense forces, public health and education, maintenance of government machinery. This type of expenditure is of the recurring type which is incurred year after year.
On the other hand, capital expenditures are incurred on building durable assets, like highways, multipurpose dams, irrigation projects, buying machinery and equipment. They are nonrecurring type of expenditures in the form of capital investments. Such expenditures are expected to improve the productive capacity of the economy.
Transfer and Non-Transfer Expenditure:
A.C. Pigou, the British economist has classified public expenditure as:
- Transfer expenditure
- Non-transfer expenditure
Transfer Expenditure:
Transfer expenditure relates to the expenditure against which there is no corresponding return.
Such expenditure includes public expenditure on:
- National Old Age Pension Schemes,
- Interest payments,
- Subsidies,
- Unemployment allowances,
- Welfare benefits to weaker sections, etc.
By incurring such expenditure, the government does not get anything in return, but it adds to the welfare of the people, especially belong to the weaker sections of the society. Such expenditure basically results in redistribution of money incomes within the society.
Non-Transfer Expenditure:
The non-transfer expenditure relates to expenditure which results in the creation of income or output. The non-transfer expenditure includes development as well as a non-development expenditure that results in the creation of output directly or indirectly.
- Economic infrastructure such as power, transport, irrigation, etc.
- Social infrastructure such as education, health, and family welfare.
- Internal law and order and defense.
- Public administration, etc.
- By incurring such expenditure, the government creates healthy conditions or environment for economic activities. Due to economic growth, the government may be able to generate income in the form of duties and taxes.
Productive and Unproductive Expenditure and Development and Non-Development Expenditure:
This classification was made by Classical economists on the basis of the creation of productive capacity.
Productive Expenditure:
Expenditure on infrastructure development, public enterprises or development of agriculture increase productive capacity in the economy and bring income to the government. Thus they are classified as a productive expenditure.
Unproductive Expenditure:
Expenditures in the nature of consumption such as defense, interest payments, expenditure on law and order, public administration, do not create any productive asset which can bring income or returns to the government. Such expenses are classified as unproductive expenditures.
Development and Non-Development Expenditure:
Modern economists have modified this classification into the distinction between development and non-development expenditures.
Development Expenditure:
All expenditures that promote economic growth and development are termed as development expenditure. These are the same as a productive expenditure.
Non-Development Expenditure:
Unproductive expenditures are termed as non development expenditures.
Functional:
Some economists classify public expenditure on the basis of functions for which they are incurred. The government performs various functions like defense, social welfare, agriculture, infrastructure, and industrial development. The expenditure incurred on such functions fall under this classification. These functions are further divided into subsidiary functions. This kind of classification provides a clear idea of how public funds are spent.
Grants and Purchase Price:
This classification has been suggested by economist Hugh Dalton.
Grants:
Grants are those payments made by a public authority for which there may not be any quid-pro-quo, i.e., there will be no receipt of goods or services. For example, old age pension, unemployment benefits, subsidies, social insurance, etc. Grants are transferred expenditures.
Purchase prices:
Purchase prices are expenditures for which the government receives goods and services in return. For example, salaries and wages to government employees and purchase of consumption and capital goods.
Hugh Dalton's Classification of Public Expenditure:
Hugh Dalton has classified public expenditure as follows:
- Expenditures on political executives: i.e. maintenance of ceremonial heads of state, like the president.
- Administrative expenditure: to maintain the general administration of the country, like government departments and offices.
- Security expenditure: to maintain armed forces and the police forces.
- Expenditure on administration of justice: include maintenance of courts, judges, public prosecutors.
- Developmental expenditures: to promote growth and development of the economy, like expenditure on infrastructure, irrigation, etc.
- Social expenditures: on public health, community welfare, social security, etc.
- Public debt charges: include payment of interest and repayment of the principal amount.
According to Benefits:
Public expenditure can be classified on the basis of benefits they confer on different groups of people.
- Common benefits to all: Expenditures that confer common benefits on all the people. For example, expenditure on education, public health, transport, defense, law and order, general administration.
- Special benefits to all: Expenditures that confer special benefits on all. For example, administration of justice, social security measures, community welfare.
- Special benefits to some: Expenditures that confer direct special benefits on certain people and also add to the general welfare. For example, old age pension, subsidies to weaker section, unemployment benefits.
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