Canons of Public Expenditure

What is Public Expenditure?

Public expenditure is the expenditure incurred by the government (Central, State, and Local) either for protecting the citizens or for satisfying the collective needs of the society. The main objective of public expenditure is to promote and maximise social welfare. In the nineteenth century, public expenditure was considered a wasteful expense, but in the present century, this expenditure is important for promoting social welfare and for making society better as a whole. Various productive activities, such as Education, health, etc., are being carried on by the government with this expense.

Canons (Principles) of Public Expenditure

1. Canon of Maximum Social Benefit

Canon of Maximum Social Benefit states that the government should plan its expenditure with the motive of maximising the social benefit. The government should allocate its expenditure to increase the social benefit. The canon of Maximum Social Benefit also focuses on improving overall production. To achieve this, the government should use the ‘Law of Equimarginal Utility’. In accordance with this law, the government should distribute its various expenditures under different heads in such a way that the marginal utility accruing from all the heads will be equal and the overall marginal utility will be maximum. The government should allocate its expenditure like an individual allocates his/her expenditure in order to maximise their overall satisfaction. However, the government faces difficulty in allocating its expenditure according to the Law of Equimarginal Utility. Evaluation of marginal utilities from various heads is the most difficult task. This canon tells the government to maximise the overall satisfaction of the society as a whole, and not that of any one section of the society. If the government tries to satisfy the needs of any one particular section over other sections, there is a violation of the Canon of Maximum Social Benefit. This canon also states that the inequalities in society should be reduced by the optimal allocation of the government’s expenditure.

2. Canon of Cost-Benefit Analysis

While allocating expenditures, the government generally faces the problem of choice. There are numerous projects with different costs and benefits. With the scarcity of resources, the government should choose the projects wisely to allocate its funds. The project(s) with minimum cost and maximum benefit are to be chosen by the government. For this purpose, various projects on the basis of their cost and benefits are compared and analysed, and the best ones are chosen.

3. Canon of Economy

Canon of Economy states that the government should not waste the hard-earned money of taxpayers, by investing it in wasteful projects. The government should not waste the funds and should double-check for the duplication of expenditures. The government expenditure, in a way, should be economical. This canon also tells the government to ensure there is no/minimum negative impact on domestic production. Although, the Indian government is not really fulfilling the canon of the economy. There is so much wastage of funds from the end of Central as well as State Governments.

4. Canon of Sanction

Under this canon, it is stated that the government should get its plan sanctioned by the concerned authorities before actually incurring it. No expenditure should be made without proper sanctioning. In democratic countries like India, the government presents its budget for any plan/project before the legislature. Only if the budget has been voted on and sanctioned by the legislature, then only the government can incur the expenditure. This canon also states that the expenditure of any particular head should not be incurred under any other head. The expenditure should be properly audited in order to avoid improper expenditure.

5. Canon of Elasticity

This canon implies that there should be as much elasticity in public expenditure as possible. In other words, there should be scope for changes in public expenditure as per the requirements of the country. For example, there should be scope for changes in public expenditure at a time of crisis because the government’s income goes down at such a time.

6. Canon of Productivity

Canon of Productivity states that government expenditure should be mostly inclined toward the development of productive activities. Development purposes can include access to education, clean drinking water, edible food, healthcare facilities, etc.

7. Canon of Balanced Income and Expenditure

According to this canon, there should be a balance in the income and expenditure of the government. At a normal point in time, the government budget should neither face surplus nor deficit. In the case of a surplus situation, the government must be spending less as compared to what it should be spending. On the contrary, in case of a deficit, the government must be spending more as compared to what it should be spending. From this point of view, the government should try to maintain a balance between its income and expenditure.

8. Canon of Equitable Distribution

This canon implies that public expenditure should be carried out in such a way that the inequalities in the distribution of income are reduced to the minimum. The public expenditure should ensure a just and equitable distribution of income among different sections and groups of the community.