Public Finance | Meaning, Objectives, Classifications, Government Revenue

Public finance is the branch of economics concerned with the financial activities related to income, expenditure, and national debt operations, and their overall impact on the economy. In essence, it involves the management and control of government income and expenditure to achieve policy objectives. This field requires a thorough analysis of the sources of government […]

Public finance is the branch of economics concerned with the financial activities related to income, expenditure, and national debt operations, and their overall impact on the economy. In essence, it involves the management and control of government income and expenditure to achieve policy objectives. This field requires a thorough analysis of the sources of government revenue, government spending priorities, and the repercussions of such expenditures on various facets of the economy.

 

Objectives of Public Finance:

  1. Facilitating equitable distribution of resources among individuals, government tiers, and different sectors of the economy.
  2. Utilizing financial tools to attain and sustain a favorable balance of payments and foster economic development.
  3. Providing a comprehensive framework for monitoring economic growth and stability.
  4. Serving as a means to achieve the economic goals set by the government.
  5. Ensuring effective fiscal policies for economic regulation.
  6. Generating employment opportunities for the populace.
  7. Meeting the needs of the people through the provision of funds for transfer payments, such as pension funds, unemployment benefits, and subsidies.

 

Fiscal Policy:

Fiscal policy is the government’s plan of action regarding revenue generation through taxation and other means, coupled with decisions on expenditure patterns. It entails using government income and expenditure instruments to regulate the economy and achieve specific economic objectives.

 

Economic Objectives of Government Fiscal Policy:

  1. Maintaining stable prices and controlling inflation and deflation.
  2. Promoting equitable distribution of wealth.
  3. Efficient allocation of resources.
  4. Ensuring full employment.
  5. Stability in the exchange rate of the national currency.
  6. Maintaining a favorable balance of payments.

 

Government Revenue:

Government revenue encompasses the total income accrued to all levels of administration from various sources.

Classification of Public Revenue:

  1. Recurrent Revenue: Collected regularly, including taxation, fees, licenses, fines, etc.
  2. Capital Revenue: Derived from irregular or extraordinary sources, used for major capital projects.

Sources of Government Revenue:

  1. Taxes (direct or indirect)
  2. Royalties from mining activities
  3. Earnings from government investments
  4. Grants and aids from individuals, foreign governments, and international organizations
  5. Borrowing (internal or external)
  6. Fees, licenses, charges, fines, etc.

Government Expenditure:

Government expenditure is the total expenses incurred by public authorities at all levels, covering infrastructure projects, social amenities, and other permanent investments.

Classification of Public Expenditure:

  1. Recurrent Expenditure: Day-to-day expenses within a fiscal year.
  2. Capital Expenditure: Investments in projects lasting more than one year.

Objectives of Government Expenditure:

  1. National security and defense.
  2. General administration.
  3. Providing social amenities like education, water supply, roads, etc.
  4. Servicing national debt.
  5. Directly participating in productive services to promote economic activities.

Reasons for Increase in Government Expenditure:

  1. Population explosion.
  2. Inflation affecting project costs.
  3. Devaluation of currency in import-dependent economies.
  4. Administrative costs associated with democratic institutions.
  5. Growing demand for social and economic infrastructures.
  6. Economic development programs requiring substantial capital.
  7. Rise in national debts due to interest capitalization.
  8. Bribery, corruption, and over-invoicing by government officials.
  9. Increased defense and security expenses.
  10. Government initiatives to combat unemployment and poverty.

Effects of Public Expenditure:

  1. Redistributing income.
  2. Generating employment through industrial investments.
  3. Allocating resources to enhance even distribution.
  4. Stabilizing prices of goods and services.
  5. Increasing productivity and individual income, thereby boosting purchasing power.

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