The public expenditure greatly affects the economic activity of the country. It influences the level of production, distribution of national income, the allocation of national resources and the level of employment. The impact of these expenditure may be discussed under following heads:
Effects of Public Expenditure on Production Activities
Dalton has discussed the effects of public expenditure on production under the following three sub-heads effect on-
(a) People’s ability to work and to save,
(b) People’s will to work and to save, and
(c) Redistribution of economic resources as between different uses and different regions.
(a) Effect of Ability to Work and Save: These expenditure affects the people’s ability to work in a number of ways. For example-
(i) The government spends on providing various facilities to the people like food, medical facilities, sanitation etc. that increase their efficiency. The increased efficiency leads to increase in production.
(ii) Public expenditure on social security scheme like old, pension, unemployment allowance, sickness benefits etc. increases the ability of the people to work which again increases the level of production.
(iii) Public expenditure when takes the form of investment, the people get additional purchasing power which increases their standard of living ;which go directly to increase their efficiency and consequently their efficiency increases.
(iv) Public expenditure increases the growth in GDP by deploying more money in the market and more development activities in the country.
Public expenditure also leads to an increase in the ability to save. With the increase in expenditure, more purchasing power comes into the hands of the public which leads to more savings. Consequently, the investment in productive activities also goes up. Thus public expenditure increases the production.
(b) Effect on will to work and save: The public expenditure produces the unfavorable effect on the will to work and save. The people are provided assistance under various social security schemes like old age pension, accident and sickness relief or unemployment allowance, they become indifferent towards their work and their will to work is affected unfavorably. Moreover their Will to save is seriously affected because when people are provided social security for the odd times why should they think of saving for future. They invariably become indifferent towards their future and start saving less than what they would have done otherwise. Thus, public expenditure, though favorably affect the ability of the people to work and to save, tends to adversely affect their will to work and to save.