Question

‘Public expenditure helps in increasing production of an economy.’ In this context, discuss any two points of importance of public expenditure.

Explain how public expenditure can be used as a tool to attain economic stability.

Answer 1

1. Effect of public expenditure on economic growth: Public expenditure plays an active role in promoting the economic development of underdeveloped countries in the following ways:
   1. By creating infrastructure and economic overheads, as well as by establishing capital goods industries, basic and key industries, etc., public spending directly supports economic development.
   2. Through the provision of facilities for training, education, and research, public spending may indirectly promote economic development. Public spending on social security programs, public health care, and education and training improves people's productivity and skill levels, which supports economic growth.
   3. Subsidies provided by the government can aid in promoting the growth of the industrial and agricultural sectors.
   4. Reducing stark differences in wealth and income, as well as regional disparities, can be achieved with the assistance of targeted public expenditure policies. Therefore, public spending contributes to social fairness and growth.
2. Public expenditure and Economic stability: Free-market economies are characterised by economic instability. Business cycles that alternate between periods of booms and depressions have been plaguing these economies. Economic stability can be achieved through the proper use of public expenditure policy as an anti-cyclical tool. Keynesian economics states that a lack of aggregate demand is the primary cause of depression, which is typified by low income and extremely high unemployment. It is anticipated that the government will increase spending during the downturn. An increase in public spending, mostly in the form of large-scale direct public investment, will immediately raise the economy's aggregate demand, which will boost output and employment. It is anticipated that the government will increase spending during the downturn. On the other side, excess demand must be reduced during boom periods, which are marked by inflation. This can be achieved by cutting back on public spending while keeping borrowing and taxation at the same levels.