Some of the main causes of public expenditure growth are: 1. Income Elasticity and Increase in Per Capita Income 2. Welfare State Ideology and Wagner’s Law 3. Effects of War and the Need for Defence 4. Resource Mobilisation and Ability to Finance 5. Inflation 6. The Role of Democracy and Socialism 7. The Urbanisation Effect 8. The Rural Development Effect 9. The Population Effect 10. The Growth of Transport and Communication 11. The Planning Effect.

1. Income Elasticity and Increase in Per Capita Income:

According to Musgrave, a rising share of public expenditure in national income is associated with a rise in per capita income.

Thus, an increase in per capita income over a period of time may cause a relative rise in public expenditure. This is because the demand for public goods tends to expand with the rise in per capita income. Usually, it rises faster than the latter. Hence, the income elasticity of public expenditure (IEPE) for the U.S.A. was 4.8 for the period 1890-1963 and 4.5 for the U.K. in 1890-1955.

2. Welfare State Ideology and Wagner’s Law:

The modern State is a welfare state. It aims at promoting the economic, political, and social well-being of its citizens. It makes every effort to improve the living standard of the common people. For this purpose, it has to undertake may functions and services never visualised before.

Even in an avowedly capitalistic economy, there has been increasing State intervention through legislative and administrative measures for augmenting production and improving distribution. Many wants which were formerly satisfied individually by private means are now satisfied collectively through public expenditure.

In the classical era, the State was assumed to have a very limited function under the laissez faire policy. The functions of the State were restricted to justice, police, and army.

Today, however, the role of the State has changed under the welfare criterion and there is a persistent trend towards an extensive and intensive increase in the scale of governmental performance. Apart from performing old functions more efficiently and on a larger scale, a modern State constantly undertakes new functions and added responsibilities day by day.

It now embraces many new ideas such as social insurance, unemployment relief, and provisions for underprivileged classes. In order to reduce inequalities of income, the State has to spend a large sum on free and cheap medical aid, subsidised food and housing, free education. Especially in underdeveloped countries such as India, the State expenditure on these social services is rising fast.

In India, for instance, expenditure on social service is rising fast. In India, for instance, expenditure on social services has gone up from Rs. 419 crores in the First Plan to Rs. 2,772 crores in the Fourth Plan. In the Seventh Plan, it was envisaged to be Rs. 29,350 crores.

Fundamentally, public expenditure in modern times shows an increasing trend on account of the “ever- increasing scale of State activity”. This tendency, in economic literature, is known as “Wagner’s law of increasing expansion of State activities”.

Adolf Wagner, a German fiscal theorist of the nineteenth century, propounded this theory according to which there is a persistent tendency towards an increase in the expenses and functions of the State, that is, there is a functional relationship between State activities and the relative growth of public expenditure owing to the “social progress” which is to be realised through State participation in economic fields. Indeed, the welfare aspect of government activity is appropriately described by Wagner as, “the pressure for social progress”.

In Wagner’s opinion, the pressure for social progress may be regarded as the root cause of the relative growth of public expenditure in modern times.

Due to the pressure of social progress under the welfare state theory, in addition to the maintenance of law and order, government participation in the economic field for the provision of some goods, such as communication, education, medical facilities, etc. was necessitated. In short, the Wagner hypothesis states that in a welfare state, as the economy expands, public expenditure will also tend to increase persistently.

3. Effects of War and the Need for Defence:

The tremendous growth in public expenditure may also be attributed to wars and threats of war in modern times. In the Second World War, countries like England incurred heavy war expenditures, amounting to £ 15 million per day. Wars and threats of war and the consequent defence needs compel governments to spend more and more on the production of war goods.

Due to the invention of nuclear weapons, there is always the danger of foreign aggression. International political situation is uncertain and insecure. Modern States are already facing a cold war. As such, every nation has to prepare itself for strong defence.

The defence expenditure is thus continuously rising. It contains expenditure on war materials, maintenance and growth of armed forces, naval and air wings, expenses on the development of military art and practice, pensions to retired war personnel, interests on war debt, cost of rehabilitation, etc.

Peacock and Wiseman have referred to the ‘displacement effect’ in the post-war period when higher taxes and higher revenue collection drive of the war period are continued by the government, finding them easy and attractive. The displacement effect may further be supplemented by a ‘scale hypothesis’, i.e., adoption of new social welfare schemes by the government on a permanent basis.

4. Resource Mobilisation and Ability to Finance:

When the government innovates more and more methods of taxation and resource mobilisation, its ability to finance public expenditure increases and the size of public expenditure grows. Public sector outlays could be increased by more taxation yields, public debt, foreign aid and deficit financing.

5. Inflation:

With the rising prices, the government has to keep on increasing public expenditure to carry out its functions and maintain the supply of public goods intact. During inflation, the government has to pay additional DA to its employees which obviously call for an extra burden on public expenditure.

6. The Role of Democracy and Socialism:

The recent growth of democracy and socialism everywhere in the world has caused public expenditure to increase very much. A democratic structure of government is inevitably more expensive than a totalitarian government. In India, democracy has certainly become a costly affair. Expenditure on elections and bye-elections is increasing.

The number of ministries and executive offices has also been increasing. Further, the ruling party has to fulfill its promises and launch upon new policies and programmes to achieve socialist objectives, in order to create a favourable image in the public. This also requires increasing State expenses in order to provide new amenities and opportunities to the people at large.

7. The Urbanisation Effect:

The spread of urbanisation is an important factor leading to the relative growth of public expenditure in modern times. With the growth of urban areas, there has been an increasing tendency of expenditure on civil administration.

Expenses on water supply, electricity, provision of transport, maintenance of roads, schools and colleges, traffic controls, public health, parks and libraries, playgrounds, etc. have increased enormously these days. Likewise, the expenditure on courts, prisons etc. is increasing, especially in the urban sector.

8. The Rural Development Effect:

In an underdeveloped country, the government has also to spend more and more for rural development. It has to undertake schemes like community development projects and other social measures.

9. The Population Effect:

A high growth of population naturally calls for increase in the expenses as all State functions are to be performed more extensively. Rising population also poses various problems in poor countries.

The State will have the added responsibility of solving such problems as food, unemployment, housing and sanitation. Further, overpopulated countries like India will have to check the population growth. The State has, therefore, to spend more and more on family planning campaigns every year.

10. The Growth of Transport and Communication:

With the expansion of trade and commerce, the State has to provide and maintain a quick and efficient transport system. Transport being a public utility, the State has to provide it cheaply also. Hence, railway and passenger transport is nationalised.

Government has, therefore, to run transport services even at a loss. This obviously calls for a high expenditure for maintenance and expansion. Further, the government in a poor country has to spend a lot on constructing new railway lines, new roads, national highways, bridges and even canals to connect the different areas with a smooth transport system as a precondition of growth.

11. The Planning Effect:

In a less developed economy, the government adopts economic planning for the development of the country. In a planned economy, thus, when the public sector is expanding its role, public expenditure obviously shows an increasing trend.

In India, for instance, the public sector outlay during the First Five Year Plan was just Rs. 1,960 crores, which is now estimated at Rs. 2, 47,865 crores during the Eighth Plan period (1992-97).