Trends in Government Expenditure

By K. P. Geethakrishnan

Summary

This booklet reproduces the Sixth Dr. S. Ambirajan Memorial Lecture, “Trends in Government Expenditure: Enhancing the Quality of Life of Our People,” delivered by K.P. Geethakrishnan — former Finance Secretary of the Government of India and Chairman of the Expenditure Reforms Commission (2000–2001) — in Chennai on 30 March 2007. Framed as a tribute to the late economic historian S. Ambirajan, the “compassionate economist,” the lecture treats government expenditure not as an accounting entry but as a tool for improving the quality of life of ordinary people, especially the poor.

Geethakrishnan first surveys the long-run history of public spending in the developed countries, drawing heavily on Vito Tanzi and Ludger Schuknecht’s ‘Public Spending in the 20th Century: A Global Perspective.’ He traces the rise of total government expenditure from around 10.8% of GDP in 1870 to roughly 45% by the mid-1990s, charting the expansion of welfare spending, subsidies and transfers, the impact of the Great Depression and the two World Wars, the constitutionalisation of welfare rights in several European states, and the late-century reaction against “Big Government” associated with Margaret Thatcher and Ronald Reagan. He argues that, the political pull toward more welfare being structural in democracies, expenditure tends to flatten rather than sharply fall.

Turning to India, he sets 1989–90 as a baseline and contrasts pre- and post-1991-reform expenditure patterns, documenting the expenditure compression that accompanied fiscal consolidation, the squeeze on Plan capital expenditure and public investment, and the comparative shortfall of Indian spending on education, health and pensions against developed-country norms. His central, deliberately counter-intuitive contention is that expenditure compression can be counter-productive: while non-Plan expenditure must be controlled, India should be willing to raise productive social-sector spending — perhaps by as much as 10% of GDP — to extend universal, good-quality education, health, infrastructure and a social safety net. He calls this a “calculated risk” worth taking and presses for pension reform, better targeting, and a genuine commitment from “the powers that be” to the quality and coverage of welfare programmes. An appendix tabulates the developed-country expenditure trends underpinning the argument.

Key points

• The work is the text of the Sixth Dr. S. Ambirajan Memorial Lecture, delivered by K.P. Geethakrishnan in Chennai on 30 March 2007.

• Geethakrishnan, a former Finance Secretary and Chairman of the Expenditure Reforms Commission, frames public spending as a tool for enhancing the quality of life rather than mere accounting.

• He surveys developed-country expenditure history (c.1870–1995), drawing on Tanzi and Schuknecht’s ‘Public Spending in the 20th Century,’ showing total spending rising from ~10.8% to ~45% of GDP.

• He notes the late-century turn against ‘Big Government’ under Thatcher and Reagan, but argues democratic pressure keeps welfare spending high.

• For India he uses 1989–90 as a baseline and documents post-1991 expenditure compression, especially the squeeze on Plan capital expenditure and public investment.

• He shows India lagging developed-country norms — and even their 1960 levels — in education, health and pension spending.

• His central counter-intuitive claim: expenditure compression can be counter-productive; India should raise productive social-sector spending, possibly by ~10% of GDP.

• He advocates pension reform, better targeting, and a ‘calculated risk’ of higher welfare spending despite the low tax-to-GDP ratio and high deficits.

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