Classification of Government Expenditure

Classification of Government Expenditure

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The amount of money spent by the public or by the government or, the government expenditure has a significant impact on a nation's economy. It is an important part of a government's budget and one of the main ways that people's welfare is ensured. It is a crucial government tool that can be utilized to achieve maximum public satisfaction. Again, it aids in overcoming the market system's resource allocation inefficiencies. It also ensures a high level of employment and price stability and helps to smooth out cyclical fluctuations in the economy. As a result, spending by the government is a big part of a country's economic growth. Under the account headings "Revenue," "Capital," and "loans," government expenditure includes all government expenditure. There are two categories of revenue expenditure: both expenditures for development and non-developmental purposes. The classification of government expenditure is closely linked to the goals of the government, such as price stability, financial control, economic growth, and so on. For instance, the accounting classification of expenditure into "Plan" and "Non-Plan" categories, as well as "Capital" and "Revenue," enables Parliament to exercise financial control over expenditure and the government's spending departments. Classification of Costs: There are four broad categories of government expenditures: Functional or budget classification, economic classification, cross classification, and accounting classification are the four types of classification.

i) Functional or Budget Classification - In India, accounts were categorized according to the organization in which the transaction occurred and the inputs on which expenditure was incurred within that organization. For instance, the construction of a hospital would be labeled "public" and displayed in accounts. orks expenditure," not as spending on a social services program like "Medical Relief. “The classification showed the kind of spending, but not what it was for. It did not make it possible to link expenditures to projects, programs, activities, functions, or programs. It lacked a management accounting approach because it did not allow for the monitoring and analysis of expenditures for projects, programs, activities, and functions. In April 1974, the Government of India introduced a new accounting structure that aims to meet both the need for financial control and accountability and the needs of management. Sectoral, major head, minor head, and five-tier classification have been established under this plan. The government's functions have been divided into three sectors by sectoral classification: General Services, Social and Community Services, and Economic Services. Each function receives a major head in the new accounting scheme, while each program receives a minor head.

i) ii) Economic Classification - The resources allotted by the government to various economic activities are referred to as economic classification. It entails organizing the public expenditures and receipts according to significant economic categories, such as separating spending on goods and services from transfers to individuals and institutions, current expenditure from capital expenditure, tax receipts by kind from other receipts, borrowing, intergovernmental loans, grants, and so on. This classification brings to light significant aggregates such as public investment, consumption expenditure, and the draft of public authorities on public savings for financing public sector development expenditures. To put it succinctly, this classification looks at all of the transactions that are conducted by the government and records how the government affects each part of the economy.

iii) Cross Classification, also known as Economic-Functional Classification Cross classification - provides a breakdown of government expenditures by functional heads in addition to economic categories. A functional head, for instance, is the expenditure on medical facilities, which is divided into various economic categories like current expenditure. Cross classification, on the other hand, demonstrates how expenditures on a specific economic category, such as capital formation, are divided among various public activities, such as education, labor welfare, family planning, and so on. An economic classification of expenditure can be analyzed according to its functions, and a functional classification of expenditure can be analyzed according to its economic character under a scheme of cross classification. As a result, the two classification systems complement one another and provide a clear picture of all government transactions.

iv) Accounting Classification - Revenue & Capital, Developmental and Non-Developmental and Plan and Non-Plan can be used to analyze the accounting classification of government expenditures. The government's various goals are served by each category of expenditures. For instance, the classification of revenue and capital expenditures indicates the proportion of government spending that result in the creation of assets in the economy and the proportion of spending that is not productive. Again, the amount of money spent by the government on social and community services, as well as economic services, versus general services is shown by the developmental and non-developmental classifications. The Planning Commission and Finance Commission use the classification of Plan and Non-Plan expenditures to determine the pattern of central assistance to state governments and union territories for plan schemes. As a result, there is a purpose for each classification of government spending.