PUBLIC FINANCE
WHAT IS PUBLIC FINANCE?
The task of economic stabilization requires
keeping the economy from straying too far above
or below the path of steady high employment.
Flexible and vigilant fiscal and monetary policy
will allow us to hold the narrow middle course.
_US President John F. Kennedy 1962
The Concept of Public Finance
It is the study of the income and expenditure of
the State. It deals only with the finances of the
government at the central, state and local levels.
It also consist of the study of the collection of
funds and allocation between various branches of
state activities which are regarded as essential
duties or function of the State.
The Concept of Public Finance
Government has to perform certain functions in a
country such as to supply certain public or
collective goods which individuals cannot or do not
single perform. And this is the responsibility of
the government to provide those goods for which it
needs revenue.
The Concept of Public Finance
In the narrow sense, public finance is defined
only as the study of income and expenditure of the
government.
But the broader view is that public finance does
not deal only with the income and expenditure of
the government but also the source of income and
the way of expenditure of various government,
corporations, public companies, and quasi
governmental ventures.
Public Finance Cycle
Formulation of
Fiscal Policy
Generation of revenue
Accountability from taxation and
other resources
Expenditures of funds
Public barrowings through the national
budget
The Concept of Public Finance
Public finance is composed of the following
constituents:
Public Expenditure: wages and salaries,
subsidies and transfer; expenditure on goods and
services such as infrastructure like roads,
electricity, telecom, and human capital
accumulation like health and education; interest
expenditures etc.
The Concept of Public Finance
2. Public Revenue: different sources of
government revenue with major focus on tax
revenue.
The Concept of Public Finance
3. Public Debt: often public revenue fall short of
expenditure and government has to borrow from
internal and external sources.
Public Expenditure
Public expenditure is the end and aim of the
collection of State revenues. It involves the
judicious expenditure of public funds on the most
important and socially and economically relevant
activities of the state.
Public Expenditure
The term “ Public Expenditures” refers to the
expenses incurred by the government for its own
maintenance and also for the preservation and
welfare of society and economy as a whole. If refers
to the expenses of the public authorities, Central,
state and local governments, for protecting the
citizen and for promoting their economic and social
welfare.
What is Public Revenue?
This is one of the branches of public finance. It
deals with the various sources from which the
state might derive it income.
These sources include income from taxes,
commercial revenues in the form of prices of goods
and services supplied by public enterprises,
administrative revenues in the form of fees, fines,
etc. and gifts and grants.
Public Debt
Public debts is the loans raised by and is a source
of public finance which carries with it the
obligation of repayment to the individuals, along
with interest, from whom the debt was raised.
The Concept of Public Finance
• Public finance is composed of the following
constituents:
4. Public financial administration: As Walter
Bagehot remarks money cannot manage itself, an
efficient, energetic and scientific management is
required to look after the public expenditure, public
revenue and public debt.
The Concept of Public Finance
What are the authorities, institutions, agencies
to look after the management, control, and
scrutinizing work created by government? How do
they keep check on the use and misuse of fund?
Answer to all these questions relate public
financial administration.
The Concept of Public Finance
What are the authorities, institutions, agencies
to look after the management, control, and
scrutinizing work created by government? How do
they keep check on the use and misuse of fund?
Answer to all these questions relate public
financial administration.
What is Public Financial Administration?
Importance of Public Finance Administration
To make sure that the government have enough
money to support public activities in term of
financial and governmental expenditures
To make sure the public fund is being managed
properly by the following the law, rules and
procedures.
To prevent from any misused of fund, corruption
in spending the public money.
What is Economic Stabilization and Economic
Growth?
STABALIZATION POLICY
Economic Stabilization policies are the tools to
ensure a stable economy, attaining microeconomic
stability, which means stability in general price
level attaining a stable economic growth rate and
high employment level among others
The major policy options that the government
uses for macroeconomic stabilization are monetary
and fiscal policies
Tools for Economic Stabilization
FISCAL POLICY
A set of government spending, taxing, and
borrowing policies used to achieve desired levels of
economic performance.
Tools for Economic Stabilization
MONETARY POLICY
Set of procedures designed to regulate the
economy by controlling:
• amount of money in circulation
• Level of interest rates
The Role of the Government
Promotion of human capital accumulation
Provision of essential public goods
Decentralization
Facilitating and regulating the private sector for
promoting industries, financial institutions, and
building infrastructure.
Protections of individual liberties
Private rights to land and capital
The Role of the Government
Good courts and legal systems
Representative political system
In absence of the government intervention, high
rates of unemployment can persist for long periods
How does the Government Work?
With Policy:
Macroeconomic Policy
• Fiscal Policy
• Monetary Policy
• Infrastructure investment
How does the Government Work?
Microeconomic Policy
• Social investment and labour policy
• Industrial Policy
• Competition Policy
Government Budgeting
oDerived from the Latin word “Bague” a French
word, “Bougetter” which means a small lesther
bag.
oBudget provision initially introduced in the UK.
In 1733, the then Chancellor of Exchequer
Walpole came with the leather bag in the
parliament to present the annual statement of
income and expenditure, and when he opened bag,
people used the term he is opening the budget.
Thus, the term budget became popular.
Government Budgeting
oBudget is a financial statement of the government
comprising expenditures and revenues for a year.
oIt is both economic as well as political document.
It is a mirror to look into development activities
undertaken by the government, which sets as
framework for policy formulation and
implementation.
oBudget document is a goods source of pubic
information on the past activities, current
decisions, and future prospects.
Government Budgeting
Reducing Economic Economic Manageme Reducing
Reallocation stability
inequalities growth nt of Public Regional
of Resources in income Enterprises Disparities
and wealth
Directly
Tax
producing
concessi
goods
ons or
and
subsidies
services
Government Budgeting
A good budget document contains:
Overall development policy
Size and composition of revenue and expenditure, and
policy
Size of composition of external and internal
borrowings, and policy
Whether budget is deficit or surplus and how is deficit
covered and surplus disposed of?
Actual of the previous year, revise estimates of the
current year and estimates for the next fiscal year.
The main components of budget are government
expenditures and government revenues. The
expenditures are classified into:
a)Object classification
b)Functional classification
c) Economic classificstion
the object classification includes expenditures on
personal compensation and benefits; travel and
transportation of persons and things; communication,
utilities and rent; printing and reproduction; supplies,
and materials; equipment; grant subsidies and
contributions; insurance claims and indemnities, and
reimbursable, etc.
Government Budgeting
Functional classification is comprised of
expenditures on general public services and
economic services.
The general public services includes: expenditure
on defense, education, health, social security and
welfare, housing and community and social services.
Economic services consist of expenditures on
agriculture, mining, manufacturing, electricity,
roads, water transport, railways, communications,
interest on the public debt and so on.
Government Budgeting
Economic classification consist of:
1. Current expenditures
2. Capital expenditure
3. Principal repayment
Government Budgeting
CURRENT EXPENDITURES
It includes expenditures on goods and services such
as wages and salaries, other purchases of goods,
interest payment, subsidies and other current
transfers.
Government Budgeting
CAPITAL EXPENDITURES
Includes acquisition of new and existing fixed
assets, purchase of land and intangible assets, and
capital transfers.
Government Budgeting
PRINCIPAL REPAYMENT
What is Revenue?
Classification of Revenues
Tax Revenue
Non-tax Revenue
Classification of Revenues
TAX REVENUE
Constitute both direct and indirect taxes. The
premier direct taxes are on net income, property,
and capital gains.
Major indirect taxes include taxes o goods and
services (VAT, excise, etc.) taxes on international
trade and transactions (export and import duties)
Classification of Revenues
NON-TAX REVENUE
Costitute income from public enterprises, sales of
government property, administrative fees, fines,
penalties, and royalties etc.
INCOME SAVINGS
BUDGET
ELEMENTS
EXPENSES DEBTS
ELEMENTS OF BUDGET
CLOSE TO REALITY
Despite being an estimate, it should be based on
reality primarily on the basis of the experience of the
previous year.
ELEMENTS OF BUDGET
SIMPLE AND OBVIOUS
Since this is a public document, all who are
interested should easily get the required information
after looking on it
ELEMENTS OF BUDGET
SINGLE FUND
A single fund of the government should be
established there for all revenues and expenditures
ELEMENTS OF BUDGET
EXTENSIVE
Should be in detail about each item of revenue and
expenditures
ELEMENTS OF BUDGET
PUBLICITY
It is made public and all the stakeholders are free to
comment on this
ELEMENTS OF BUDGET
ANNULARITY
Prepared for one fiscal year
