LECTURE: PUBLIC FINANCE

Finance- art and science of managing financial resources

PUBLIC FINANCE- is the study of finance related to government entities. It revolves

around the role of government income and expenditure in the economy.
- Local public finance refers to the conduct and management of
financial affairs, transactions, and operations of provinces,
cities, municipalities and barangays.
In some laws, Public Finance is referred to as fiscal
Administration. Regardless of how it is called, it is all about
basically three things.

First, the generation of resources and revenues, primarily

through taxes and transfer of grants from the national
government.
Second, the allocation and utilization of such resources and
Revenues.
And Third, the management and control over revenue generation
and resource utilization.
In simple terms, Fiscal Administration is the branch of economics
that deals with the revenues and expenditures and their impact on the economy. It is the
manner of collecting something from the constituents and spending it also for the
constituents.
Fiscal Administration is the act of managing incoming and outgoing
monetary transactions and budgets for governments, educational institutions, nonprofit
organizations, and other public service entities. It refers to systems, processes,
resources, and the policy, environment, government, the inter-government and inter-
local fiscal relations, affecting among others.
Major Activities in Public Fiscal Administration:
1. Fiscal policy formulation
2. Taxation and revenue administration
3. Budgeting and expenditure
4. Public borrowings and debt management
5. Accounting and auditing
For after all, public fiscal administration is about public finance which
pertains to the raising and spending revenue for the functions of the state. These
functions have been changing with the development of the society.
It is about a government raises money, how that money is spent, and the
effects of these activities on the economy and society. It studies how governments at all
levels- National, State, and Local- provide the public with desired services and how
they secure the financial resources to pay for these services.
 The performance of these functions leads to expenditure. The expenditure is
incurred from funds raised through taxes, fees, sale of goods and services and loans.
The different sources constitute the revenue of the public authorities. Public Finance
studies the manner in which revenue is raised; the expenditure is incurred upon
different items etc. Thus, public finance deals with the income and expenditure of public
authorities and principles, problems, and policies relating to these matters.

Public Finance is an enquiry into the facts, techniques, principles, theories,

rules and policies which shape, direct, influence and govern the use of SCARCE
RESOURCES, with alternative uses, of the government.

IMPORTANCE OF PUBLIC FISCAL ADMINISTRATION AND PUBLIC

FINANCE
1. Provision for Public Goods. For providing public goods like roads, military services,
street lights and etc. public finance is needed. Business firms will have no incentive to
produce such goods, as they get no payment from private individuals.
2. Public finance enables government to tackle of offset undesirable side effects
of a market economy. The side effects called spill overs or externalities. For example,
pollution. The government can introduce recycling programs to lessen pollution or they
can make laws to restrict pollution or impose pollution charges or taxes on activities that
bring about pollution.
3. It helps government to redistribute income. To reduce the inequality in the
economy, the government can impose taxes on the richer people and provide goods
and services for the needy ones.
4. It provides programs for moderating the incomes of the rich and the poor. Such
programs include social security, welfare and other social programs.
5. As the scope of state participation in the economic activity is widening, the scope of
public finance has also been increasing. Generation of employment opportunities,
control of economic fluctuations like boom and depression, maintaining economic
stability etc. are some of the thrust areas of the governments through fiscal operations.

Categories of Public Finance

⮚ Public Expenditure
It deals with the principles and problems relating to the
allocation of public spending. We study the fundamental
principles governing the flow of public funds in to different
channels, classification and justification of public
expenditure; expenditure policies of government and the
measures adopted for welfare state.

⮚ Public Revenue
The income of the state is referred to as Public Revenue.
In this branch, we study the various ways of raising
revenue by the public bodies. We also study the principles
and effects of taxation and how the burden of taxation is
shared among the various classes of society.

⮚ Public Debt
The government borrows when its revenue falls short of its
expenditure. Public debt is a study of various principles
and methods of raising debts and their economic effects. It
 also deals with the methods of repayments and
managements of public debts.

⮚ Public Budgeting
It deals with the methods of Budget preparation,
authorization, execution and accountability of budgets.
Government budgeting is the critical exercise of allocating
revenues and borrowed funds to attain the economic and
social goals of the country. It also entails the management
of government expenditures in such a way that create the
most economic impact from the production and delivery of
goods and services while supporting a healthy fiscal
position.

⮚ Economic Stabilization and Growth

The use of public revenue and Public expenditure to
secure stability in levels of prices by controlling inflationary
as well as deflationary pressures is studied. Similarly, the
income and expenditure policies adopted by the
government so as to attain full employment, optimum use
of resources, equitable distribution of income etc. are also
studied.

Functions of Public Finance

1. The Allocation Function
The allocation functions deals with the allocation of such
public goods. The government has to perform various functions such as maintaining law
and order, defense against foreign attacks, providing healthcare and education, building
infrastructure, etc. The list is endless. The performance of these functions requires large
scale expenditure, and it is important to allocate the expenditure efficiently. The
allocation function studies how to allocate public expenditure most efficiently to reap
maximum benefits with the available public wealth.
2. The Distribution Function
There are large disparities of income and wealth in every
country in the world. These income inequalities plaque society and increase the crime
rate of the country. The distribution of public finance is to lessen these inequalities as
much as possible through redistribution of income and wealth.
In Public Finance, primarily three measures are outlined to achieve
this target-
✔ A tax-transfer scheme or using progressive taxing, i.e. in
simpler words charging higher tax from the rich giving
subsidies to the low-income.
✔ Progressive taxes can be used to finance public services
such as affordable housing, health care, etc.
✔ A higher tax can be applied to luxury goods or goods that
are purchased by the high-income group, for example,
higher taxes on luxury cars
3. The Stabilization Function
Every economy goes though periods of booms and
depression. It’s the most normal and common business cycles
that lead to this scenario. However, these periods cause
instability in the economy. The objective of the stabilization
 function is to eliminate or at least reduce these business
fluctuations and its impact in the economy. Policies such as
deficit budgeting during the time of depression and surplus
budgeting during the time of boom helps achieve the required
economic stability.

CAREER OPPORTUNITIES IN PUBLIC FINANCE

1. INVESTMENT BANKING
An investment banking career in public finance domain entails
raising funds for the development of public projects.
Investment bankers help government entities in the following
three areas-
❖ Raise funds by underwriting debt securities such as
bonds, debentures, commercial papers, etc.
❖ Analyzing project finance opportunities for large
government projects and raising debt and equity funds
for such projects.
❖ Advising government companies on mergers and
acquisitions, divestments etc.
2. RESEARCH
This is a fairly large area of public finance careers, and a lot
of public finance professionals eventually become
researchers. Many large banks, government entities, and
world organizations require public finance professionals to
consolidate necessary data points for decision making. Thus
there is a regular requirement of public finance professionals
in the field of research.
3. ACADEMIA
A lot of public finance professionals eventually go on to
become professors and teach public finance in universities
and colleges. Not only limited to teaching, but they also
participate in university researches to improve understanding
of the field and create new tools for efficient practical
application.

PUBLIC FINANCE AND PRIVATE FINANCE

The understanding and the study of public finance is facilitated by a
comparison of the public or government finance with privates or individual finance. Such
a comparison will help us to know how the aims and objectives and methods of public
finance operation are similar or different from financial operations of the individual.
SIMILARITIES
✔ Both the State as well as individual aim at the satisfaction wants through their
financial operations. The individuals spend their income to satisfy their wants
whereas the state spends for the satisfaction of communal or social wants.
✔ Both the States and Individual at times have to depend on borrowing, when their
expenditures are greater that incomes.
✔ Both Public Finance and Private Finance have income and expenditure. The
ultimate aim of both is to balance their income and expenditure.
✔ For both kinds of finances, the guiding principle is rationality. Rationality is in
sense that maximization of personal benefits and social benefits through
corresponding expenditure.
✔ Both are concerned with the problem of economic choice, that is, they try to
satisfy unlimited ends with scarce resources having alternative uses.

DISSIMILARITIES

✔ The private individual has to adjust his expenditure to his income. i.e. , his
expenditure is being determined by his income. On the other hand, the
government first determines its expenditures and then the ways and means to
raise the necessary revenue to meet the expenditure.
✔ The government has large sources of revenue than private individuals. Thus, at
the time of financial difficulties the state can raise internal loans from its citizens
as well as external loans from foreign countries. In the case of private individual,
all borrowings are external in nature.
✔ The individual and state also differ in their motives regarding expenditure. The
individuals hanker after profit. Their business operations are guided by private
motive. But the state expenditure is guided by the welfare motive.
✔ The state prepares its budget or estimates its income and expenditure annually.
But there is no such limitation for an individual. It may be for weekly, monthly and
annually.
✔ A surplus budget is always good or a private individual. But surplus budgets may
not be good for the government. It implies two things. a.) The government is
levying more taxes on the people than is necessary and b) the government is not
spending as much as the welfare of the people as it should.
✔ An individual spending policy has very little impact on the society as a whole. But
the state can change the nature of an economy through its fiscal policies.
✔ Individuals always seek quick returns they save only a small amount for future
and spend more to satisfy their current needs. Similarly, they seldom spend if it
does not yield any money income. On the other hand, State has a long-term
perspective of its expenditure. It does not care only for immediate profit. State
spends on projects having long term gestation period. The burden of taxation is
borne by the present generation in the interest of long run welfare of the
community. Similarly, sometimes government may have to spend on schemes
which may not yield any money income at all (example. Public Health)
✔ The pattern of expenditure in the case of private finance is often influence by
customs, habits social status etc. The pattern of government expenditures is
guided by the general economic policy followed by the government.
✔ The state, when hard pressed can resort to printing of currency, as an additional
source of revenue. But an individual cannot raise income by creating money.