PUBLIC FINANCE

Nithin Kumar
Department of Economics
University Evening College
Mangalore
INTRODUCTION
• The government of every country has to perform
certain special functions which can be classified
under two heads

1. Obligatory Functions

2. Optional Functions

• To perform all these functions adequately and

efficiently, the government needs funds from the
public.
MEANING OF PUBLIC FINANCE
• The study of public finance as a branch of economics has
come to occupy a very important place in economic
literature since last ninedecades.

• Public finance is that science which deals with the

income and expenditure of the public authorities.

• The word public authorities include all sorts of

governments.
Continued…

• The term public finance is a combination of two words,

namely Public and Finance.

• The ‘public’ is represented by the government or state.

• The other word ‘finance’ means money resources.

• These money resources are in the form of income and

expenditure.
• Thus, public finance refers to the systematic study of the
operations of public income and expenditures of the public
authorities.
 DEFINITIONS
• Adam Smith - “Public finance is an
investigation into the nature and principles
of the state revenue and expenditure”

• Prof. Dalton - “Public finance is concerned

with income and expenditure of public
authorities and with the mutual adjustment
of one another.”
Continued…

• Findlay Shirras - “Public finance is the

study of principles underlying the spending
and raising of funds by public authorities”.

• H.L Lutz - “Public finance deals with the

provision, custody and disbursement of
resources needed for conduct of public or
government function.”
Continued…
• Harold Groves - “Public finance is a field of
enquiry that treats on income and outgo of
governments (i.e. federal, state and local).”

• Richard Musgrave - “The subject matter of

public finance is logically, though not solely,
concerned with the financial aspects of the
business of the government.”
Continued…

• C.F. Bastable - “Public Finance deals with

expenditure and income of public
authorities of the state and their mutual
relation as also with the financial
administration and control”
 Private Finance and Public Finance
• Private Finance is the study of Income and Expenditure of
an private Individual or Private institutions

• Private Finance can be classified into two categories the

personal finance and business finance.

• Personal finance deals with the process of optimizing

finances by individuals such as people, families and single
consumers.

• Business Finance involves the process of optimizing

finances by business organizations
 Similarities Between Private
Finance And Public Finance
1.Maximum Advantage

2.Precedence of Income

3.Scarcity of resources

4.Borrowings

5.Adjustment of Income and Expenditure

1. Maximum Advantage

 The objective of the both is to secure the maximum

advantage out of the expenditure.

 Private individual tries to maximum Utility out of his

expenditure and Government Wishes to achieve maximum
social Advantage out of its Expenditure

2. Precedence of Income

 In private finance, the Income must precede expenditure.

 In public finance as well, the revenue has to be raised before

the expenditure can be met.
3. Scarcity of resources

 Scarcity of resources in relation to ends is a factor common to

both.

 The private individuals as well as the state have to adjust their

scarce resources to meet multiple ends.

4. Borrowings

 Both the private individuals as well as the state have to resort to

borrowing when expenditure exceeds revenue.

5. Adjustment of Income and Expenditure

 Both the public and private finance always face the same problem,
i.e., the problem of adjustment of income and expenditure.
 Dissimilarities/Differences Between Private
Finance and Public Finance
1. Determination of Expenditure 8. Secrecy of the budget

2. Differences in credit status 9. Elasticity of finance

3. Right to print currency 10.Pattern of Expenditure

4. The law of Equi - marginal11.Time Duration

utility 12.Differences in objective
5. Nature of Budget 13.Effect on Economy
6. Compulsory character

7. Coercive Method
1. Determination of Expenditure

Government first determines the volume of

expenditure that it has to incur on different heads
to perform their obligations and then tries to find
out the resources to meet this expenditure

Individual first considers his income and then

determines the volume of expenditure, it has to
incur on different heads or items of consumption
Continued…
2. Differences in credit status

 The credit of a private individual is, at best, limited.

 He can borrow a limited sum of Money for a limited source

 Private individuals can rise credit only within the economy

 It means that the private finance has a limited source

 The government enjoys a very high degree of credit in the

market

 It can borrow large amounts not only from its citizens but also
from the foreigners
Continued…
3. Right to print the currency

 The government has a source of income which is not available to

the private individual

 The government can print notes which are legal tender within the
country

 The government often resorts to the printing press to cover the

deficit in the budget engendered by war or an economic crisis

 The private individual enjoys no such right of printing the

currency
 Continued…
4. The Law of Equi – Marginal utility

 The private individual arranges his Expenditure in accordance with the law of Equi-
Marginal Utility

 A Private Individual distributes his income between consumption and savings in such
a manner as to equalize their marginal utility

 A Private individual tries, as far as possible, to apply the law of Equi – Marginal
Utility to his Expenditure

 The government does not give as much importance this law as a private individual
does

 Modern governments sometimes incur certain types of expenditure from which they
do not derive any advantage

 They do incur this type of expenditure to satisfy certain sections of the community
 Continued…
5. Nature of Budget

Surplus budget is always god for a Private

Individual

Private individual spend less than his income and

save something

The government generally Prefer deficit budget

Government spends more than its income

Continued…
6. Compulsory Character

 Public finance is known for its compulsory

Character

 The public authorities cannot avoid or postpone

certain expenditure

 Eg; Expenditure on Defence public administration,

maintenance of law etc.

 Private finance is voluntary in nature

 Individuals can plan to postpone their expenditure

Continued…
7. Coercive Method

 The government can use coercive methods to collect

revenue

 For example government can raise non repayable loans

 No citizen can refuse to pay taxes if he is liable to pay

them

 Private individuals cannot use force to get their income

 Individuals have to earn their income by their own

efforts.
Continued…

8. Secrecy of the Budget

 The budget of an individual is shrouded in mystery

 Secrecy is maintained in budget of the private private

finance

 But in the case of government budget there is no

secrecy is maintained

 In a democratic country , the government presents its

budget before the parliament where it is widely
discussed and subjected to criticism
Continued…
9. Elasticity of Finance

 Public Finance is more elastic/flexible than private finance

 There is no much scope for changes in private finance

 In Public finance drastic changes can be done

 Example – A private individual cannot effect any special

increase in his income nor he can bring about any special
changes in his expenditure

 But, the government can increase its income imposing new

taxes. Likewise it is also in a position to make the necessary
changes in its expenditure
 Continued…
10.Pattern of Expenditure
 The Public expenditure is governed by deliberate economic
policy of the government
 The economic, social and political requirements Of the
country are considered while planning the public
expenditure
 Private finance is influenced by habits, fashion, customs,
status and personal needs of the individual
 Immediate objective of the private finance is maximization
of their satisfaction
Continued…
11.Time Duration
 In public finance state allocate resources on various projects
which yield return only in the future. Example investment in
education

 It means public finance has a long term perspective.

 In private finance private individuals tries to satisfy their

present needs and are interested in obtaining quick returns

 It shows that private finance has a short term consideration

Continued…
12.Differences in objectives

The objective of private finance is to fulfill private

interest

The objective of Public finance is to secure the

maximum social advantage to the society

The motive of private expenditure is personal

benefit

The motive of public Expenditure is social Benefit

Continued…

13.Effect on Economy

Private expenditure, being small in

relation to public expenditure, has only a
marginal effect on the economy

Public expenditure being in gigantic size

has a tremendous impact on the economy
 Objectives of Public Finance
1. To Secure adjustments in allocation of Resources

2. To maintain economic stability

3. To accelerate economic development

4. To secure distributive justice

5. To reduce economic inequalities

6. To achieve full employment

7. To achieve optimum utilisation of resources

8. To increase rate of capital formation by increasing the rate of

saving and investment
 COMPONENTS OF PUBLIC
FINANCE

1. Public Revenue

2.Public Expenditure

3.Public Debt

4.Financial Administration

5.Economic Stabilization
 PUBLIC REVENUE
• The income of the government through all sources
is known as public revenue

• This component deals with the different sources

and methods of raising the revenue to the
government

• It also studies about the classification of taxes,

burden of taxes, effects, taxable capacity etc.
 PUBLIC EXPENDITURE
 Public expenditure refers to the expenditure incurred
by the public authorities

 This component deals with the principles and

problems related to the allocation of government
spending

 It also studies about the classification of public

expenditure, its effect, public expenditure policies of
the government, and trends in public expenditure
 PUBLIC DEBT
Public debt refers to the loans raised by the
government both internally and externally

This component of public finance studies

the need for and methods of raising public
debt and problems related to raising and
repayment of public debt
 FINANCIAL ADMINISTRATION
 Financial administration refers to the study of
different aspects of public budget

 It deals with the organizing and disbursing of

the finances of the state

 The objective of framing budget, the methods

of framing it, sanctioning and audit etc., are
studied under this
 ECONOMIC STABILIZATION
 this component of public finance studies the
use of public revenue and public expenditure
to secure economic stability and growth.

 It includes various economic policies and

measures of the government that are used to
achieve full employment, balanced growth and
optimum use of resources
PUBLIC REVENUE
• Government needs to perform various
functions in the field of political ,social and
economic activities to maximize social and
economic welfare . In order to perform
these duties and functions government
require large amount of resources. This
resources are called Public Revenue 35
 PUBLIC REVENUE
• The term Public Revenue can Be used in two senses

Public Revenue

Narrow sense
Wider sense

It includes only those It includes all the

sources of income of income & receipts of
the government which the government
are described as irrespective of the
revenue resources sources

36
 PUBLIC REVENUE
• Narrow sense - it • Wider sense – it

includes only those includes all the income

sources of income of the and receipts of the

government which are government irrespective

described as revenue of their sources.

resources. • Eg:- loans raised by the

• These sources are not government which is to

subject to repayment. be repaid.

• Eg:- tax, fee, fines etc. 37

 PUBLIC REVENUE

• In Aggregate public income or the

public revenue is the income of the

government through all the sources.

38
 SOURCES OF PUBLIC REVENUE
• The sources by which a government earns its
income are classified into two categories.
a. Tax Revenue
b. Non Tax revenue
Administrative Revenue
Commercial Revenue
Other revenues

39
• Tax revenue is the income that is gained by governments through
taxation.

• Taxes are compulsory contribution levied by the state for meeting

expenses in the common interests of all citizens.

• Tax revenue can be

classified into: TAX

(1) direct taxes and

DIRECT INDIRECT
(2) indirect taxes. TAX TAX

40
• Direct Taxes: A tax is said to be direct, if the tax
payer bears the burden of the tax. He cannot shift
the burden to any other person. Example – Income
tax, wealth tax and gift tax.

• Indirect Taxes: Indirect tax is shifted by the payer

to others. If sales tax is imposed on sugar, the
producer or dealer who pays it passes it on to the
next buyer and ultimately the burden is borne by the
consumer. Example- Sales tax
41
 NON – TAX REVENUE
SOURCES

• Non-Tax Revenue sources of public

revenue which are raised by the

government from other than tax in

the economy.
42
 ADMINISTRATIVE REVENUES
• Fees

• Special Assessments

• Fines and Penalties

• Forfeitures

• Escheats

43
 ADMINISTRATIVE REVENUE
• Fees

Prof. Seligman – “A payment to defray the cost of each

recurring service undertaken by the government, primarily
in the public interest, but conferring a measurable special
advantage on the fee payer” (Essays in Taxation)

• Fees is a payment charged by the government to bear the

cost of administrative services rendered in public services.

• Fees is not a voluntary payment it is a compulsory

payment.
44
Continued…
• Special Assessment :-

• Prof. Seligman – “A compulsory Contribution, levied in

proportion to the special benefit derived to defray the cost of
special improvement to property undertaken in the public
interest.”

• Example - by the construction of roads, schools etc are going to

yield some common benefit to the society. Because of this the
values or the rent of the property may increase.

• So that the government can impose some levy on these special

assessments to recover a part of expenses incurred.
45
 Continued…

• Fines and Penalties

These are not an important source of

public revenue.

Fine - punishment imposed for

infringement of law.
46
Continued…
• Forfeitures

It refers to the penalty imposed by courts for the

failure of individuals to appear in the court.

• Forfeitures are also not important source of public

revenue.

47
Continued…
• Escheats

Escheats are the claims of the government to the

property of a person who dies without having any
legal heirs or without keeping a will.

• In such situations all the property of the person

including bank balance and other properties pass to
the government.

48
 COMMERCIAL REVENUE
• Public authorities own and manage commercial and
industrial enterprises

• Example – Railways, Post, different modes of Transport

and other public sector industries

• The income earned by these public sector enterprises by

selling the goods to the citizens is known as the
commercial activity

• In other words commercial revenue is the income earned

by the government by involving in commercial activities
 OTHER REVENUES
1. Gifts, Grants and Donations

2. Government properties

3. Public borrowings

4. Tributes and Indemnities

5. Recovery of loans

6. Miscellaneous Sources
GIFTS, GRANTS & DONATIONS
 Government earns income in the form of gifts,
grants and donations offered to it by the citizens,
institutions and foreign governments and
international institutions for different purposes

 For example grants by the international monetary

institutions for rehabilitation work during the natural
calamities
 GOVERNMENT PROPERTIES
• Government earns income from public
property like land, Buildings, mines,
forests, fisheries etc.,
 PUBLIC BORROWINNGS
• Public authorities can borrow from various sources
both internally and externally

• These sources include borrowings from its citizen,

foreign government, commercial banks, central
bank of the nation, international Monetary
institutions like IMF, IBRD, World Bank ADB etc.,

• These borrowings to be repaid in the future.

TRIBUTES AND INDEMNITIES
• Some governments gets extraordinary
revenue in the form of tributes and
indemnities

• Foreign countries pay tributes

• Indemnities paid in case of any damage to a

country either by war or aggression
 RECOVERY OF LOANS

• Governments may get revenue by

way of recovery of loans due from
debtors to it
 MISCELLANEOUS SOURCES

• Government may also get some

revenue by auctioning Confiscated
goods, printing of currency notes,
etc.,
 PUBLIC
EXPENDITURE
 MEANING
• Public expenditure is that expenditure which is
incurred by the public authorities (central,
State or Local Governments) either for
protecting the citizens of for satisfying the
collective needs of the citizens or for
promoting their economic and social welfare
 HEADS OF PUBLIC
EXPENDITURE
• Different economists like, Adam Smith, Pigou,
Dalton, J S Mill and others have classified public
expenditure according to their own basis of
classification

• Public expenditure may be broadly grouped under two

heads. They are

A. Revenue Expenditure

B. Capital Expenditure
 REVENUE EXPENDITURE

• Revenue expenditure refers to the expenditure

incurred by the government for the day-to-day
administration

• Revenue expenditure classified into

1. Civil Expenditure

2. Defence expenditure

3. Grant in aid to other governments

4. Miscellaneous expenditure
 CIVIL EXPENDITURE
• Civil expenditure refers to the expenditure of the
government pertaining to the maintenance of justice, law
and order.

• Civil Expenditure Includes

1. Expenditure on General Services

2. Expenditure on Civil Services

3. Expenditure on Economic Services

4. Expenditure on Public Debt Service

1. Expenditure on General Services

• It involves the expenditure on Parliament, Legislatures,

Maintenance of embassies, government departments, police
force, Salaries of govt. Employees, Ministers etc.,

2. Expenditure on Social Services

• It refers to the expenditure of the government on social and

Welfare activities

• It includes the expenditure on drinking water facility,

education, health, housing and various other social security
measures

• This kind of expenditure improves the social welfare and

standard of living of the people
3. Expenditure on Economic Services

 It is the expenditure incurred on the development of

economic Activities

 It includes promotion of industries, agriculture, transport,

trade communication, irrigation, banking etc.,

 It helps in improving the productive capacity of the

economy

4. Expenditure on Public Debt Services

 It includes the interest payments on the public debt and

repayment of public debt
 DEFENCE EXPENDITURE
• It includes the expenditure on defence forces,
production of arms and ammunition, pension to
retired defence personnel, etc.
 Grants-in-Aid
• It consists of the financial assistance given by
government to other governments

• For example grant given by the central

government to the states and union
terroitories for financing their economic
projects
 Miscellaneous Expenditure
• It includes the expenditure of the
government in providing subsidies to
industrialists, exporters, relief and
rehabilitation of the people during the
natural calamities, financial aid to the
economically vulnerable sections and
regions
 Capital Expenditure
• It refers to the expenditure incurred on creating
permanent revenue yielding assets. It includes

i. Developmental Expenditure

ii. Non-Developmental Capital Expenditure

iii. Repayment of Public Debt

iv. Loans and Advances to other Governments

• Since 1987-88 onwards central government of
India adopted a new classification of Public
Expenditure
• Under this public expenditure classified under
two heads
A. Plan Expenditure
B. Non-Plan Expenditure
 Plan Expenditure
• It refers to those expenditures which directly contribute
for the economic development of the country

• It is divided into three subheads

1. Economic Services

2. Social and Community Services

3. Grants-in-Aid to States and union Territories and

Foreign Governments
1. Economic Services

• It includes the expenditure on

Agriculture and allied activities,
industries and minerals, Mining,
manufacturing, transport and
communication development, credit and
financial institutions etc.
2. Social and community Services

• It help in building up of the productive

capacity and efficiency of the people

• It includes the expenditure on education,

training and skill information, research
and development, family planning,
medical and health, Labor and
employment generation etc.
3. Grants-in-Aid to States and union Territories
and Foreign Governments

• It includes the developmental grants given

by the central government to sates and
union territories for the purpose of
undertaking various developmental
projects
 Non-Plan Expenditure
• These expenditures do not contribute
directly for the development of an economy,
but they are essential for carrying on day-
to-day activities of the state
 Continued…
• It include

a. Interest Payments and debt servicing charges

b. Defence expenditures

c. General services

d. Subsidies

e. No-governmental grants to states and union territories

f. Tax collection charges

g. Police expenditure

h. Loans to states and foreign governments

i. Loans to public Enterprises

 Role of public Finance in a Developing
Economy

1. To increase the rate of Capital Formation

2. To increase the rate of economic growth

3. To Achieve optimum utilisation of resources

4. To Achieve Full Employment

5. To Reduce Economic inequalities

6. To Counteract inflation