CHAPTER 5: PUBLIC FINANCE

CONCEPT IN PUBLIC FINANCE

Public finance is the branch of economics that studies the government activities and
the alternative means of financing government expenditures.

GOVERNMENT REVENUE GOVERNMENT EXPENDITURE

• Money collected by a Divided into 2 categories:

government from various
sources. • Operating expenditure and
development expenditure.
• Revenues earned by the
government are received from • Operating focuses on the
sources such as taxes levied on operations and administration of
the incomes and wealth the government department.
accumulation of individuals, non-
tax revenues such as fees and
penalties and non-revenue
receipts.

ECONOMIC FUNCTION OF GOVERNMENT

❖ Adjust the allocation of resources

❖ Assist private sector to ensure economic stabilization.
❖ Create a business environment
❖ Redistribute income and wealth among the population.

❖ Provide a legal and social framework for the effective operation of an economy.
GOVERNMENT REVENUE

TAX REVENUE

▪ This revenue source is a compulsory contribution that is imposed by the

government on private individuals and organizations.

▪ It is divided into two (2) types of taxes:

Direct Taxes:

• Tax where burden of the tax falls on the taxpayers and cannot be shifted
to someone else.
• Eg: individual income tax, company income tax, petroleum income tax,
stamp duty, real property gains tax and road tax.

Indirect Taxes:

• Taxes where burden of tax can be shifted to another person.

• Eg: export duties, import duties, excise duties, sales tax and service tax.

NON-TAX REVENUE

▪ Non-tax revenues are revenues which arise from other sources besides tax.

▪ It includes receipts from licenses, regulation fees and permits, services fees, sales
of goods, interest and return on investment as well as fines.

NON-REVENUE RECEIPTS

▪ This revenue includes refund of expenditure, interdepartmental credit, refunds of

overpayment, erroneous payment, and reimbursement as well as contribution
from government departments, statutory bodies and government-owned
enterprises.
GOVERNMENT EXPENDITURE

Emoluments

Service charges

Debts
OPERATING
EXPENDITURE

Pensions and gratuities

Expenses of operating and
administering a
government department.
Grants and transfers

Asset acquisitions

Supplies and services

Economic services
(agriculture, rura
development, trade,
DEVELOPMENT industry)
EXPENDITURE

Social services (education)

Exoenditure for
investment purposes to
improve facilities in the
Defense and security
basic physical
(armed forces)
infrastructure

General administration
TYPES OF TAX STRUCTURE

Proportional tax

• Tax imposed so that the tax rate is

fixed, with no change.
• Example: corporation tax

Progressive tax

• Tax imposed so that the effective

tax rate increases as income
increases.
• It imposes a greater portion of tax
on the higher income group than
the lower income group.
• Example: personal income tax

Regressive tax

• Tax imposed so that the tax rate

decreases as the income increases.
• The lower income group will bear a
higher proportion of tax than the
higher income group.
• Example: sales tax and property tax
 TYPE PROGRESSIVE PROPORTIONAL REGRESSIVE
Income Tax rate Total tax Tax rate Total tax Tax rate Total tax
(%) (%) (%)
1,000 6 60 6 60 6 60
2,000 9 180 6 120 5 100
3,000 12 360 6 180 4 120
4,000 15 600 6 240 3 120

TYPES OF GOVERNMENT BUDGET

BALANCED BUDGET (G - T)

• The government's total expenditure is equal to its total revenue.

• The economy has reached full employment.

SURPLUS BUDGET (G<T)

• The government's total expenditure is less than its total revenue.

• Adopted by government to overcome inflation by raising the tax and

reducing government expenditure.

DEFICIT BUDGET (G>T)

. The government's total expenditure is more than its total revenue.

. Government will use this budget when the economy is in recession by raising
government expenditure or reducing tax.
FISCAL POLICY

CONTRACTIONAL FISCAL POLICY EXPANSIONARY FISCAL POLICY

▪ A policy that is used as a

▪ A policy that is used by the federal
macroeconomic instrument by the
government to stimulate economic
federal government to slow down
activities.
the economy.
▪ Expansionary FP is implemented
▪ This policy is implemented when
when there is a deflationary or
there is an inflationary gap, the
recessionary gap by increasing G
government will decrease G and
and decreasing T to increase AD.
increase T to reduce the AD.
▪ During recession
▪ During inflation

PUBLIC FINANCE IN ISLAM

ZAKAT AL- FAI JIZYAH

KHARAJ
WAKAF

SADAQAH USHUR TAXATION

 Z AK A T

Payment of zakat is a religious duty and forms one of the pillars in Islam. Zakat
is collected from a null one-year possession of wealth which reaches to the
Nisab. The government should establish a proper body to enable a centralized
collection of zakat. In Malaysia, Zakat Collection Centre under the Islamic
Religious Department with close supervision by the central fund of the state.

AL–FAI

This source of revenue refers to the property or wealth that is surrended by

non-believers at war, but done so without fighting. Such property will go to
the Baitulmal.

JIZYAH

The tax imposed on non-Muslims in lieu of the guarantee given to them by an

Islamic state for the protection of their lives and properties.

It is responsibility of an Islamic government to protect the lives and properties

of the non-Muslims in the same manner as they would protect their Muslim
citizens.

KHARAJ

The tax on land or agricultural land owned by a non-Muslim in the Islamic

state. The tax rate will depend on certain factors, such as the quality of the
land, fertility and irrigation requirements.

It should be fixed on the basis of the equity to prevent any injustice towards
the farmers.
 WAQAF

A property donation by an individual for the use of less fortunate Muslims,

such as orphans and the poor.

This usually entails a donation of a building or a land, or an amount or money

to Muslims, religious purpose or charitable purposes with no intention of
reclaiming the assets.

SADAQAH

Sadaqah (voluntary charity) is derived from the word Sidq which means
sincerity of faith from the person who gives it.

According to the Shariah, sadaqah is not compulsory, it represents the

worshipping of Allah SWT by donating money.

Sadaqah is not subject to any conditions, or where or how much to donate.

USHUR

The revenue collected from trade and businesses carried out by all citizens of
the Islamic state, regardless of their religion and beliefs. Similar to al-fai, this
revenue will also go to Baitulmal.

TAXATION

The Islamic state has a right to impose taxes, as the Islamic government is
responsible for ensuring that the basis needs of its citizens are met in
accordance with the socio- economic status of the country.

Taxation is a major source of revenue for the government. However, the

government needs to ensure that is does not demotivate the taxpayers from
working harder. In order to be fair and just, the government should minimize
the tax burden on poor people.
ISLAMIC GOVERNMENT EXPENDITURES

Expenditure on tasks ordained by the Shariah

❖ The first category of public expenditure in an Islamic economy encompasses the

expenditure on responsibilities, in line with the Shari'ah.

❖ These includes defense, law and order, justice, need fulfillment, da'wah and civil
administration.

❖ Resources for funding of these expenditures include the income derived from the
privatization of public property (e.g oil, gas and electricity), revenue beyond zakat,
and other forms of revenue apart from additional taxes.

Expenditures necessitated by tasks assigned to the state by the people.

❖ The third category of expenditure is for tasks allocated to the state by the people.
It is presumed that the people are willing to pay for the goods and services
involved.

❖ A distinctive characteristic of these tasks is the supply of private goods.

❖ Under Islamic concepts, the state is responsible for establishing, maintaining, and
operating the public utilities such as clean water supply, electricity and postal
services.

❖ The state also spends on public works and infrastructure such as bridges,
irrigation canals, and road constructions.