- Public Expenditure and Economic Stability
Cyclical changes are an inherent character of a market economy.These changes are called Trade Cycles,and are manifested as the state of recession,depression,recovery and boom.The states of recession and depression are particularly dangerous for restricting the pace of growth.Inflation is equally bad when it tends to be galloping or hyper.Note the following observations to understand how public expenditure facilities economic stability:
1. Public Expenditure and depression
During depression,the prices of commodities tend to fall. Accordingly there is a fall in production and employment.Unemployment increases.Both the producers and the consumers become pessimistic.Producers reduce output because of the lack of demand.Consumers,hoping for a further fall in prices,suspend their existing consumption needs.Accordingly,reduction in demand is compounded.As a consequence,the vicious circle of reduced demand,reduced production,and reduced employment sets in.Here comes the significance of public expenditure.According to Keynes, in the state depression,the government should plan for a comprehensive increase in public expenditure.It can be of twp types:
i. Compensatory Expenditure
It includes those spending which the government makes on public works so as to increase employment and aggregate demand.Such spending generate multiplier effect on income.Income rises in consonance with increased employment,acting as an anti-dote the situation of depression.
ii. Pump Priming Expenditure
During the depression periods,investment is low.If investment is made in public sector,it will prompt private investment as well.Public expenditure thus made is called pump priming.Initial expenditure by the government particularly on infra-structural facilities,tends to be conductive for an all round growth of private investment.
Taylor categories public expenditure during depression as
(a)Home Relief
(b) Unemployment Compensation Plans, and
(c) Work Projects.
a) Home relief is provided to the poor so as to increase their consumption,without getting their services.This is a kind of transfer payments expected to raise consumption expenditure.
b) Unemployment Compensation Fund is set with the help of the employers,employees and the government.Help is provided to the workers during the period of unemployment out of this fund.
c) Work projects include public works like construction of roads,bridges and dams, etc. Expenditure on such projects will projects will generate income to combat deflation through increased demand.
2. Effect of Public Expenditure and Inflation
Public expenditure can be used as a policy instrument to curb inflation.It should focus on the following areas:
i. Increase in Production
Public expenditure should be utilized for increasing production. Increase in production during inflation implies increased flow of goods and services in the economy.In the backdrop of rising prices,increased flow of goods and services will help strike a balance between demand and supply.
ii. Reduction in Consumption
In a state of price-rise,the government should reduce its consumption expenditure.This will reduce the pressure of demand on the goods and services.Accordingly prices are expected to fall,or at least their pace of rise will be arrested.
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