Effects of Public Expenditure on Production

Effects of public expenditure on production The popular idea of public expenditure is that it is money just spent and the mailer ends there. Some people would think that all public expenditure is unproductive. But that is not so. Public expenditur

Effects of public expenditure on production

The popular idea of public expenditure is that it is money just spent and the mailer ends there. Some people would think that all public expenditure is unproductive. But that is not so. Public expenditure has got far-reaching effects both on production of wealth and on its distribution in the community.

Effects of public expenditure on production

Public expenditure may be productive directly or indirectly. Governments, in every country, are running commercial enterprises which are directly productive. The Indian Government has created solid and lucrative assets in the forms of canals and railways. The State industries make a direct contribution to production in the community. In the same manner, schemes of reclamation and afforest ration are also directly productive.

A great deal of public expenditure is, however, only indirectly productive. In this connection lion we may consider the effects of public expenditure on—

(a)        Power to work and save.

(b)       Will to work and save.

(c)        Diversion of resources as between employments and localities; and

(d)       The total volume of employment and income.

As for power to work and save, it can be spotted out that a great deal of the publicly advantageous public expenditure sustained by current governments undoub­tedly augments the community's industrious power and, as a result, in addition the command to save.

As for the willpower to work as well as save, much relies on the nature of public expenditure and the strategy leading it. By providing the people hope of future gains from public expenditure, it can dull the border of the aspiration to work and save.

Regarding the diversion of resources as between employments and locali­ties, public expenditure may have distinctly a beneficial effect on production. Through the system of bounties and subsidies a government may succeed in diverting resources to hitherto neglected channels and thus create new indus­tries. In the same manner, by spending money on the development of backward areas, government may add to the total production in the country. A wisely Conducted policy of public borrowing stimulates saving and the habit of investment in the community which are certainly beneficial to production. It also diverts resources into channels which may add considerably to the wealth of the community.

We may thus safely conclude that wise public expenditure exerts a very wholesome influence on production. It assists production indirectly by adding to the power to work and save and by a profitable diversion of resources. This is besides taking up directly the work of production through State enterprises.

Till recently, the discussion of the effects of public expenditure was mostly confined to the indirect effects discussed above. However, with the Keynesian revolution it has come to be realized that public expenditure can exercise directly an important influence on the level of economic activity. We know that unemployment in the Keynesian system is due to deficiency of effective demand. Public expenditure has a direct influence on the level of effective demand. An increase in public expenditure during a depression helps to create more demand and thereby increases the level of employment and production. Indeed, at times this direct effect may outweigh the indirect effects of public expenditure discussed above.

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