The Effect of Public Expenditure on Income Distribution - Statistics Project Example

Title: The Effect of public expenditure on income distribution Date: November 25, 2008 Introduction The public expenditures as committed by the governments are an essential part of the government’s public policy for the development of all segments of society on equal basis with adequate measures for the marginalized groups of the society for their economic uplifts. The governments are committing their expenditures under different heads for example general administration, defence, law enforcement, education, health, social welfare, religious ad culture activities, distribution of power and fuel, promotion of various sectors for the social uplifts of the society like agriculture, industries transportation and other economic services. The expenditures under various head are calculated by the government on the basis of budgetary measures. Different types of budgetary documents are utilized by the government for collection of data, compilation of data. Its comparison with corresponding previous year and the proportion of each head had with overall public sector expenditure. The governments are incurring expenditures for the promotion of a balanced society with the development of all the faculties relating to human development in line with the major targets and objectives. The governments are making their calculation for the fulfillment of national and international requirement to promote national growth of the economy, to adopt new technologies in various discipline of human development. The government expenditure re divided into heads and sub heads. In addition the governments have classified essential and non essential expenditure on the basis of their geopolitical and economic environment. These expenditures as committed by the government are having their developmental impact on the growth and promotion of the human society. The guiding principles for the government to classify and prioritized their expenditure are on the basis of composition of the human society in economic terms. Each country has divided the society into various groups and sub group depending on the criteria for classification. For example majority of the country have divided their countrymen by considering the level of poverty as prevailing in their society as the groups living under the poverty line or above the poverty line depending on the method for the selection of criteria for measuring poverty level. Some other countries have divided their society on the basis of distribution of income in the society as lowest income group, low income group, middle income group, high income group and the highest income group. In many countries of the world for example in Thailand major portion of the income is distributed in the highest income group for example as table 1 below is indicating that 41.48 % of income is existing in the highest income group and if high income group and the highest income group are calculated together, 63.41 % of the income is concentrated in both these two groups. The governments are making their plans to device strategies for the distribution of income from the higher income group towards the lower income group in the form of imposition of taxes to the highest class and giving concessions to the groups belonging to the lower income categories. In Thailand distribution by income class as in 2007 has been arranged in the form of following table. The table has been divided into four columns at variable as shown in the table include income class, percentage of household income per month of each income class and percentage of income. Table 1. Distribution of income by income class. The above table indicate that highest per month income is prevailing in the highest income group which equal to 21335 baht per month and the lowest income is existing at rate of 4197 per month. It is a challenge for the government to device strategies for providing an economic environment where all the segments of society can fulfill their basic human requirement and to promote their intellectual development as per their aspirations and targets. The government is designing its program to promote economic development in all the fields of human activities for the creation of a balanced and just society. The government is concentrated on the low income groups in the form of programs and strategies for the eradication of unevenness in its economic terms from the society within shortest possible time and with the utilization of optimum resources with an objective in mind to take maximum benefit with the promotion of intellectual and technological sectors as per international standards so that the economic benefits may reach equally to all segments of the society. The following table indicates consumption expenditure pattern by each income class for their survival and economic growth within a specific time period. Table 2. Collect data on consumption expenditure patterns spent by each income class. Income class Proportion of income spent on health Proportion of income spent on foods Proportion of income spent on transportation Proportion of income spent on education 1.Lowest income 5.66 12.55 1.74 5.82 2.Low income 9.43 15.25 4.02 8.67 3.Middle income 14.39 18.16 6.88 12.73 4.High income 19.95 22.99 17.61 22.01 5.Highest income 50.57 31.05 80.93 50.75 Total 100.00 100.00 100.00 100.00 The above table indicates that highest income group is making expenditure in all the priority sectors with maximum input on the transportation facilities, the next priority areas for the highest group are education and health. Both of these sectors are essential for economic sustainability and growth in the future years. If we compare the expenditure of the lowest income group with that of the highest income group there is a ratio of approximately 1:10 in the areas of education and health and 1:3 in the food items consumption. The government exclusively and private sector generally may concentrate on the promotion of education and health for the uplifting of low and lowest income group towards their upward movement. The following table has determined the distributive impact of public expenditure on the income of each class. Table 3.Calculating the distributive impact of public expenditure on income class Figures in million baht Type of expenditure Total amount Income class Lowest Income Low Income Middle Income High Income Highest Income 1. General Administration 77317.5 6309.1 9409.5 12571.8 16955.7 32396.0 2. Defence 85219.00 11998.84 13707.48 15450.2 17866.2 26375.3 3.Law Enforcement 77868.3 10963.9 12525.12 14117.53 16325.1 24100.3 4.Education 294959.9 17166.66 25573.0 37548.4 64920.7 149692.1 5.Health 102243.5 13117.84 15045.13 17580.76 20423.1 36076.62 6.Social Welfare 94482.7 18896.54 18896.54 18896.54 18896.5 18896.54 7.Religious and Culture Not mentioned 8.Power and Fuel Not mentioned 9.Agriculture 71264.1 7379.386 9770.29 12264.53 16005.8 25843.886 10.Industries Not mentioned 11.Transportation Not mentioned 12. Other Economic Services Not mentioned 13.Debt Management Not mentioned Total 802804.2 85832.166 104927.06 117115.76 269612.47 448270.21 Percentage 100% 10.69% 13.07% 14.59% 33.58% 55.83% The figures for each income group have been calculated on the basis of provided instructions for making the calculations. For example for calculating the expenditure on education, the figures are drawn on the basis of 50% of the benefits is distributed as proportional to the number of household in each income class and 50% is distributed as proportional to household expenditure on education in each income class. Similarly all other figures have been calculated on the basis of the given instructions. The figures as indicated in table 3 above are again advocating the hypothesis that economic growth of each income class is positively co-related with the investments in the field of education and health. The expenditure as committed and incurred by the government for various sectors of the economic are again benefiting the highest income classes with the allocation of maximum amount towards highest groups with little concentration in the lower and lowest groups of the society. The data indicate that the government needs re-designing in their public policies for making adjustment in the distribution of funds for the benefit of the neglected groups especially on economic lines. In the coming years the government will design its programs which will be focused towards the uplifting of the lowest and the lower income groups with the improvement in their per capita income and re arrangement of their resources toward the social sectors like education and health. Education elevates and refines the personality and general health provides a social environment for the individual to exercise their mental faculties for the betterment of the individual level and uplifting of the society at the national level at least in economic terms. Calculating the effective benefit rate (EBR) EBR= Total amount of each expenditure benefit of each member class X100 (Total amount per year of each income class) X (Total amount of household in each income class) The effective benefit rate is calculated by multiplying total amount of each expenditure benefit of each member class with hundred and then dividing the product with the product of total amount per year income of each year and Total amount of Household in each income class. Table 4 Effective Benefit Rate (%) Type of expenditure Income Class Lowest income Low income Middle income High income Highest income 1. General Administration 9.72 6.52 4.88 1.91 3.62 2. Defense 7.54 5.78 4.87 2.21 6.12 3. Law enforcement 6.89 5.28 4.45 2.02 5.60 4. Education 23.93 17.81 15.22 7.66 24.40 5. Health 8.24 6.34 5.54 2.52 8.44 6. Social welfare 24.63 8.73 4.84 1.42 1.80 7. Agriculture 12.10 5.58 3.87 1.55 3.27 Total 93.055 56.04 43.67 19.29 53.15 Post expenditure income distribution. Post expenditure income distribution is calculated with the help of the following given formula where household income of each income class is determined by deducting expenditure incurred by each income class from the total income of each income class. Following three categories of data is essential for completing the said calculations: a. Total income of each income class during a period of time. b. The Expenditure as committed by each income class and c. Household income of each income class. The figures of expenditures by different classes are determined on the basis of household income of each class and different categories of the expenditure incurred by the household to meet their social and economic needs. The formula helps in calculating the taxes as well as a base line data for the government agencies to draw their policies for the distribution of money within the different categories of the masses. The expenditure base provides a mechanism for the redistribution of public money from the higher income group towards the lower income groups for addressing economic deprivations of the lowest and low income groups. Post expenditure income distribution Household income of each income class after expenditure = Total income of each income class + Benefit of expenditure received by each income class Post expenditure income distribution is calculated with the help of above given formula where household income of each class after expenditure is equal to the total income of each income class and benefit of expenditure received by each income class in a particular period of time. The household income is co-related with the level of expenditure received by each income class, maximum benefit will have positive impact upon the house hold income and vice versa. Table 5 Income distribution before and after expenditure (% of total income) Income Class Pre-Expenditure Post-Expenditure Income 1. Lowest income 8.16 11.16 307,221,774,055.00 2. Low income 12.17 13.45 370,336,058,445.00 3. Middle income 16.26 16.55 455,675,127,330.00 4. High income 21.93 21.20 583,792,633,175.00 5. Highest income 41.48 37.65 1,036,721,686,995.00 Total 100 100.00 2,753,747,280,000.00 Gini co-efficient 0.31 0.24 The above figures as included in table 5 indicate that income distribution before and after expenditure is highly concentrated in the upper three classes that is middle income, high income and highest income of the society under reporting as a. Income distribution in terms of both pre expenditure and post expenditure are higher in terms of middle income class, high income class and highest income class as 79.65 % of the pre expenditure is with these three classes and only 20.35 % is with the lowest and low income classes. b. Similarly, post expenditure income in middle class, higher and highest class is 78.84 % rest with these classes. c. The lowest and low income groups are weak and poor segments of the population as both in terms of pre expenditure and post expenditure income distribution. A comparison of Method used for calculation with those in Medhi’s research The impact of income distribution as a result of the public expenditure and its comparison with the method as used by Medhi’s paper is given below: Medhi in his paper has described that the level of expenditure as incurred by the government in the public sector has a co-relationship with the gross domestic production (GDP) and gross net production (GNP). Moreover, Medhi has mentioned that the distribution of public expenditure in different social sector has an impact on long lasting basis. For example the expenditure as committed in the sectors like health, education and agriculture are indirectly boosting the economy of the country. The public sector expenditures are meant for the growth and expansion of the economy. Medhi has included that redistribution of wealth had a largely neutral effect on the growth of the economy. Similar types of result have been noticed in the current study as the expenditure as incurred by the government in various sectors of the economy is having their social and economic impacts. It has been observed that the benefits are largely enjoyed by the higher and highest income groups as the economic development has its direct relationship with the level of quality education and healthy manpower. The expenditure as experienced by the government in social sectors like food and agriculture, general administration and power and fuel distribution are all are the boosting factors in the expansion of the economy and with the passage of time it is expected that a just and balanced society will emerge with a high level of health standards, intellectual learning and better socio economic conditions. Medhi has mad his calculation on the basis of data available and its impacts as a result of the expenditure. In the present study the calculation have been calculated on the basis of given instructions and their impact have been calculated by analyzing the available result within the each table and their overall impact on class basis. Policy Recommendations From the above described tables it is clear that the expenditure base is only concentrated in three major areas of the public policies like defence, health, education and food distribution. The data indicate that the expenditure is mainly concentrated in the middle class, higher class and the highest class. The narrow expenditure base provides a little fiscal space for the policy makers to allocate necessary funds for generating mechanisms for the distribution of wealth equally among all the members of the society. The policy makers need to concentrate on increasing the level of expenditure with the imposition of import tax and excise taxes for generating sufficient funds to meet the expenditures of the state. The distribution of expenditure for various sectors has its impact on the growth and expansion of the society. For the promotion of a balance society, the government may like to concentrate on the formulation of economic and social policies directed towards the uplifting of marginalized groups of the society especially lowest income, low income and middle income classes. It has been commonly been observed and shown in the table 1 and 2 above that these three groups are least benefited from the economic and development policies as adopted by the government while making programs for the economic uplift of their general masses. The pro-poor focus of the government towards these classes will help them to concentrate on their primary needs especially relating to health and education with better transport and food availability. These policies on continues and unidirectional basis will help these groups to make progress and come up with better social indicators. It is also recommended that public expenditures may be directed towards all the sectors without any interruption. The continue supply of public expenditure will bear fruits in the form of social and economic development of all the classes of society including the lowest income, the low income and the middle income classes. It is expected that the government will consider the recommendations by evaluating their input cost and expected benefits on cost benefit basis. Conclusion The enforcement of new public policies will provide necessary funds for all the segments of the society including lower and lowest income groups. The government needs to formulate programs for extending maximum expenditure to the lower and lowest income groups. Moreover, middle income group which serve as backbone of the economy need special attention both in terms of the allocation of resources and their utilization. These steps will promote distribution of money among all the segments of the society and opportunities of growth and development will be available to these target groups. These steps will create an enabling environment for each group to develop and strengthen their economic positions for a better societal setup. Read More