How is public expenditure financed?
Typically, tax and non-tax revenue, borrowings (domestic/foreign), disinvestment proceeds, spectrum and coal auctions etc fund government expenditure.
How is it spent?
Government expenditure is towards its current consumption, transfers to households and subsidies for domestic goods and exports. The difference between revenue and expenditure is its savings. Other sources of savings include households, enterprises, and foreign capital flows. Part of the total savings is invested on fixed capital and the rest on inventory. This total fixed capital investment generates demand for various goods and services.
Why are household savings important?
Over 90 per cent of our government debt is internal. Higher savings allows banks, insurance firms to lend at easonable interest rates.
How much do households save?
As per an estimate, households spend about 68 per cent of their earnings on consumption, save 28 per cent and pay 3 per cent to government as direct taxes. Households account for well over half of the total savings in the economy, though their share fell from 65.3 per cent in 2011-12 to 59.2 per cent in FY16. Non-financial corporations’ savings increased to 37.3 per cent in FY16 for 34.3 per cent in FY15, while financial corporations’ share fell to 6.5 per cent from 8.3 per cent.
Who among households save more?
84 per cent of household savings were accounted for by the top 30 per cent of households in rural and urban areas, with about 37 per cent coming from the rural top 30 per cent and the balance 47 per cent from the urban top 30 per cent.
What about government savings?
Government has negative savings, as it spends nearly two-thirds on current consumption, while its transfers to households and others accounts for 40 per cent and 2 per cent respectively, leaving it with negative savings of 6 per cent. One way to increase savings is to impose additional taxes on households so that government can raise revenue and hence savings, known as the so-called ‘Johansen
closure’ named after Leif Johansen who first introduced the specification. Alternatively, it can reduce current expenditure and boost savings in order to meet the target level of investment.