Government Expenditure -
An Economic Growth Stimulator Or Not?

A principal objective of government expenditure is to achieve sustainable and equitable economic growth. Government expenditures play an important role in physical and human capital formation over a period of time. Appropriate public expenditures can also be effective in boosting economic growth, even in the short run. Therefore, the effect of government expenditures on economic growth may be a comprehensive indicator of the productivity of government expenditure. Ideally, the two components of such an indicator should be measured with:

  1. The contribution of public sector outputs to economic growth, and
  2. The efficiency with which these expenditures yield their outputs.

For a country like India where majority of the population lives in the rural area and dependent on agriculture with an average age of 30 years, a large amount needs to be invested in physical, economic and social infrastructure. Also is the fact that India has large chunk of poor and disadvantaged population in the world. The government plays a significant role as a driver of economic activity, it also provides economic and financial support to under-privileged and disadvantaged communities and regions through various government schemes and programmes.

The economic policies of the different government have more or less been the same for the last decade or so with some difference in emphasis and approach in one situation or other.

The citizens expect the government resource allocation, economic and social policy choices to be consistent and equitable with each other and also help enhance India's economic growth by managing risk and dealing with uncertainty. The state and the central governments on an average spend 1/4th of its GDP on development and the non-development expenditure. Also majority of the population being based on agriculture, during drought and famine, the government spending increases and during the post period its expenditure decreases. The question that arise is, Is it sufficient to raise government expenditure during the year of drought? or do the Government need to invest consistently over a longer period for building the capability to deal with the next drought situation or any situations that cause high degree of uncertainty? Also, what stops the government to invest more consistently in agriculture when required?

May be some economists presume that India has transitioned from being an agriculture dependent economy or may be its fear of inflation or high fiscal deficit.

Policy makers should use the best available resources to analyze and see that government spending designed to stimulate overall growth of the economy. Where the assumptions or data are uncertain, the analysis should fully explore and understand the potential consequences of different assumptions or the uncertain data.

While Government claims that through public expenditure it provides public goods that markets generally do not provide, such as military defence, enforcement of contracts, and police services. However, there is no reliable source as such that allows the government to know where goods and services can be most productively employed. It also cannot be denied that at times government spending is driven by political mileage, rather than spending money where it is most needed, legislators; instead, allocate money to favoured groups. Though this may yield a high political return for incumbents seeking re-election, but such process does not favour economic growth. Again, although it is claimed that government spending has positive multiplier effect, but in reality government spending is likely to have a smaller multiplier effect. Also it is to be noted that as taxes finance government spending, therefore, increase in government spending increases the tax burden on citizen directly or indirectly which reduces private spending and investment. Also Government spending reduces savings in the economy, thus increasing interest rates. This can lead to less investment in areas such as home building and productive capacity, which includes the facilities and infrastructure used to contribute to the economy's output. And on the other hand, when government cuts its expenditures, there is a surge in private investments.

Having said all these, the fact of the matter that needs utmost consideration is the fact that an effective yard scale needs to be devised to decide on to the following:

  1. How much government spending is enough or not, or
  2. How much is too much?
  3. Also whether the government expenditures made truly yield desired results and if not.
  4. What rectification steps needs to be taken

While some spending on highways, infrastructure, defence, courts etc is probably or definitely beneficial, many economists also suspect that public spending has decreasing marginal benefits this is because after a certain point, further spending results in slower growth by crowding out private sector activity. Strong reasons can also be advocated to justify that governments cannot allocate resources as efficiently as private markets.