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PUBLIC FINANCE AND BUDGETING

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Institution

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PUBLIC FINANCE AND BUDGETING

Introduction

As one of the branches of economics, public finance deals with the Government's

expenditure and revenue. It plays a crucial role in the mitigation of stabilizing the supply,

distribution, and allocation of government resources to matters relating to the developmental

goals of a particular country. As the name indicates, the public stands for the government

administration, while finance stands for the science applied in managing the funds. Public

finance can be described as the study of government allocations of resources with the aim of

fulfilling public affair objectives.

Public finance targets to answer the question of how a Government raises its income from the

limited resources available to sustain the ever-increasing public expenditure. It assesses how

revenue obtained by the Government can be adjusted and managed to cater to Government

expenditure on public affairs and how the two can be balanced to ensure the economy still

thrives and assurance of quality living standards to the citizens of the nation. Public finance aims

to avoid possible adverse effects that can arise from the imbalance of government resources to its

citizenry affairs. It is concerned with income and expenditure on public services and adjustments

involved to minimize putting pressure on each other to realize desired outcomes fair to both

parties.

The current economic and financial crisis across the globe has provided a formidable test to

Public finance management. weak expenditure control mechanism that has been applied by

individual Government have been delicate to withstanding the turbulence experienced in the
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economy. Politicians and other government officials have a duty to provide policies, regulations,

rules, procedures, and laws that can influence the fiscal decision-making bodies. This would lead

to the realization of empirical and theoretical analysis showing how the macroeconomic sector

can influence fiscal outcomes. The analysis would display the need for economic sustaining

policies that would expose in detail the living standards of the citizens and raise the objectives of

the fiscal effects. A robust sector would mean that there are suitable economic conditions that

translate to market confidence as well as the rebuilding of economic stability and sustainability.

An Article "Public Finance: Concept, Definition, and Importance for Country's Development

Public Finance Management (PFM) and its relationship with other Macroeconomic Sectors

As PFM deals with Government revenues, resources, and expenditures, macroeconomics

is a branch of economics that deals with the large-scale economic factors that are crucial to the

economy of national importance, such as economic growth rate, gross domestic product, interest

rates, inflation, unemployment, and national productivity (Hein, E.,2019). These sectors

determine how the Government allocates the available resource to the most crucial factor that

may culminate to negatively affecting the economy. This binds Public Finance Management with

microeconomics together since both branches complement each other to ensure they both sustain

and develop an economy.

Economic performance can be analyzed after its performance can be evaluated.

Domingues, A. R. et al.,(2017), argues that if you cannot measure, then you cannot control; if

you are not able to control, then probably you cannot manage, and if you are unable to manage,

then you cannot deliver. This implies that the relationship between public finance management
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and the macroeconomic sectors should be of mutual consent for an economy to thrive. Economic

performance can only be judged a success when the design, quantifiable indicators, and

implementation are used as the apparatus to deem it so. Most government organizations are

caught in between balancing their income and pressure to reduce costs. This can be moderated by

the politicians, managers of public corporations, and the technical aspects as they are significant

players in the macroeconomic sector( Nasir, M. A.,2017). Macroeconomic targets to improve on

the economic growth, price stability, and full employment.

The governments being the body in charge of protecting the public goods, distributional

of social justice, national defense, regulation of market failures, investment of public assets, and

interacting with other corporate sectors, are advised to reduce their domestic borrowing, which is

usually accompanied by high interest rates that relatively spread into the public sectors. With

fiscal policies controlling the interest rates and alternatively, the Government reducing domestic

borrowing leads robust macroeconomic environment (Abdymomunov, A.,2020). The

Government's central bank should also issue stipulations governing the rates offered by the

financial institutions in that country. This would result in the stability of the local currency

against world reserve currencies which would provide a lucrative environment for the economy

to thrive.

Macroeconomic Linkage

This linkage can be described as the relation of different sectors in their outputs and

inputs in matters relating to the rest of the economy. According to Dhital S. (2019), a

government can reach out to other economic players and bring them on board when planning
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public finance policies or economic regulations as they are significant players in its income. The

Government engages with other sectors such as; public sector corporations, household, private

sector corporations, and other nations by the issuance of tax breaks, infrastructure, subsidies,

goods and services, defense, international and trade agreements and from this government input,

it is able to obtain taxes, profits, rents, fees and levies from the other sector, this means the

Government is repaid for its policies linking different sectors that play a crucial role in the

economy of a nation. The act of Government engaging other sectors on behalf of the population

reduces taxation, expenditure on capital projects, and social expenditure on its people (Marfatia,

H.,2020).

Macro-Linkages in National Account

The economy being the production and consumption of goods and services and the

monetary supply of a government, it evaluates how the Government, households, and societies

allocate their limited resources. The economy provides valuable insights concerning how

decisions relating to and affecting daily activities. According to Granovetter, M. (2017), the

economy is concerned with the distribution of resources optimally in the society to sustain its

essential requirement.

Macro-linkage in the national account indicates that for an economy to thrive, the public

must be willing to bear the cost of running the Government. In return, the public depends on the

Government for legislation and regulation of policies benefiting them. It is a symbiotic

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relationship where all the parties need to work hand in hand to reap the maximum from each

other (Dhital S., 2019). In a simple structure, the public carry-out labour and source for capital to

earn wages which are used to procure goods and services produced by local firms; this translates

to the total output being everything produced by the firms and utilized by the consumers.

Measuring the Economy

The Gross Domestic Product (GDP) is the most effective and viable way to measure the

health of an economy. The GDP measures the production value of all goods and services

manufactured within a country on an annual or quarterly basis(Radovanović, M.,2017).

Economist utilizes the gross domestic product to determine whether a national economy is on the

expansion (the normal state of an economy or at some cases growth) or if it is in recession (the

plummeting of an economy just after it has reached its peak). Lowering in the Gross domestic

product leads to the recession, which is usually characterized by a surge of unemployment rates

and poor living standards as most citizens cannot cater to their basic needs.

Apart from giving detailed information as to how the economy of a country is

performing, the Gross domestic product also tells the economist about the size of the economy.

When the performance of the GDP is growing, it is likely to increase employment chances as

both local and international production is high, making labour available. GDP growth would

account for the difference in the value of goods and services if they were divided across the

board to all inhabitants of that specific country from one year to another. GDP can be measured

in every three months (quarterly year) to give the government information on the directions the

economy is taking.
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The essence of the gross domestic product is to give investors insight into the

performance of a particular country to determine if it is appropriate or not to invest in that

particular country. It can be relatively correct to argue that growth generates good loops for

prosperity and opportunities in a country's economy (Radovanović, M.,2017). The Gross

domestic product per capita deduces the value of goods and services when they are equally

divided among all the citizens of a nation. A plunge in per GDP capita income decreases the tax

revenues for the Government, which leads to the reduction of the funds spent on public services

by the Government. In the long run, both parties end up depreciating their economic values, with

the poor being the most affected as the class gaps extend and becomes more evident. On the

other hand, the Government scrambles for alternatives to this deficit by regulations such as

imposing extra tax levies on diesel and petroleum products or seeking loans that are justifiable in

the post Keynes world (Estevão, J.,2020).

FISCAL ADJUSTMENTS

Fiscal adjustments can be described as a reduction in the initial government budget; they

are applied as a mitigation measure to salvage the economy from crumbling when there is a

reduction in government expenditures. It results in an increase of taxes on the public as means of

Government to cover the deficit. Several countries in the European Union implemented or are

considering implementing fiscal adjustments, according to Kenn-Ndubuisi, (2021), in order to

improve budgetary figures. Although they basically have no noticeable impact on the

government finances may in the future lead to high public debt levels.
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How are the fiscal adjustments a necessary evil

A government may opt for fiscal adjustments when it wants to cut its budget deficit or

targeting to lower its public debt ratio. But before it implements the adjustments, it must engage

its economic experts on how to do it and when to apply them. By how it relates to whether raise

taxes on its citizens or cut the public spending. On the query of when the Government's

economic experts advise on whether adjustments should be applied, when the economy is

thriving, or the current state of the economy. In most cases, fiscal adjustments are applied when

economies are in a recession (Borge, L. E.,2020).

When a government opts to adjust fiscal policy, increase or decrease economic activities

so as to level the rate of public spending and tax revenue. This can be a win for the public since

the Government can use revenue saved or obtained from taxes to boost future economic activities

by increasing the spending on public affairs or decreasing the tax levies or, in other cases, both

of them(Borge, L. E.,2020).

BUDGETING

Budgeting, on the other hand, is the strategic implementation of a business plan.

Budgeting is essential as it helps the managers of specific institutions control spending, track the

expenses and save the institution funds. It also helps the management make informed decisions

on financial matters, repay debts, and focus on viable long-term goals (Dhital, S. (2019). In

governments, budgeting is the process of outlining the projected expenditure and the expected

government revenue in the following fiscal year. Based on these feasible estimates, the

Government can allocate the resources at hand to essential services pertaining to running the

economy.
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Budgeting theory

It is the academic study of social and political incentives influencing Government and

society budgeting. They include Tragedy of the Commons which is an economic theory showing

economic problems where almost all individuals have an incentive to utilize a resource at the

expense of other individuals without away of excluding the rest from consuming

(Abdymomunov, A.,2020). It is a self-interest first type of approach where everyone works to

suit their own desire. It culminates in the harm of the economy as the resources are over-

exploited, leaving everyone without any resources to consume (Kenn-Ndubuisi, 2021).

The second theory is the spatial theory which is based on gaps and procedures followed within

the Government, while the third theory is the Law of 1/N in Distributive Politics, which is based

on representation.

Types of budgets

There are three main types of budget: surplus budget, deficit budget, and a balanced

budget. A surplus budget is a budget where the expected revenue surpasses the intended

expenditure in a fiscal financial year. This indicates that government income from the revenues

collected is higher than the funds spent on public utilities (Granovetter, M.,2017). This is an

excellent sign of the growth of the economy, which comes with a lot of positive implications,

from the excess revenue, obtained, the Government offloading the national debt by repaying
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loans, and falling of bond yields which assures a future government without loan baggage or

borrowing less. They, however, this type of budget cannot be applied in cases where there is

recession, deflation, or economic slowdown as it will have a detrimental impact on the economy.

This would create a rigorous process to revamp the economy (Abdymomunov, A.,2020)

A deficit budget is a budget whose estimated expenditure surpasses the expected revenue

collection by the Government in a fiscal financial year. The implementation deficit budget

usually helps in the generation of extra demands and promotes economic growth, resulting in the

increase of revenue, subsequently reducing the deficit as time goes by (Granovetter, M.,2017).

For the Government to alleviate the impacts that come with the deficit, it opts for utilizing the

accrued surplus reserves or to turn to domestic borrowing. This budget results in the Government

borrowing excessively or excessive expenditures.

A balanced budget is a type of budget that estimates government expenditure will be

equal to the expected revenue returns in a fiscal financial year. For a government to attain this

type of budget is not an easy task. It requires appropriate policies and regulations to govern the

taxing system to ensure the expected revenues are achieved. However, this type of budget should

not be misconstrued to indicate financial independence or stability when an economy is in

depression or at times of deflation. The significant advantages of the balanced budget are that it

enables the Government to evade excessive expenditure and allowing the Government to direct

funds and resources in crucial areas that require immediate action.

Importance of budgeting in Government

Budgeting ensures there is proper resource allocation; it ensures this by identifying

crucial areas that have a weakness to enable the Government to make amends and allocate
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resources to them in a justifiable and sustainable manner (Hein, E.,2019). This is the chief theme

behind budgeting, as it ensures that funds go to the sectors where they are critically needed.

Using previously validated data to identify areas facing challenges in the budget enables the

Government to display effective and efficient governance relating to issues to deal with the

economic stability and sustainability of a country.

A budget permits a government to set and adjust tax imposes in numerous sectors; factors

contributing to the growth of the economy such as investments, bonds, and expenditures tend to

be the driving factors contributing to the growth of a country's economy. The Government

provides a sustainable platform for people to carry out more savings and investments by issuance

subsidies and tax reductions (Bleyen, P.,2017). This directly improves and ensures the growth of

an economy and makes it more stable.

Through budgeting, a spur of growth is realized and injected into the business and trade sectors

of an economy. The Government encourages these sectors by revising policies and regulations

that may impede their performance(Hein, E., 2019). This encourages the business community to

invest more hence translating to economic growth and prosperity.

By budgeting, an economy is able to mitigate through inequality and economic disparity,

which are formidable threats that can bring an economy to its knees. The Government is able to

address these uncertainties by introducing a series of policies that favor the economic and public

demands so as to empower sectors that may seem neglected or undervalued through their

incorporation in the budget.

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It is only through a budget where a Government can focus its attention on the companies

and private sector by introducing suitable policies that would help in the growth, which would

consequently result in the creation of employment opportunities hence more generation of

revenues (Estevão, J.,2020). The budget process is meant to make a difference in the aim of

realizing sustainable and developmental results.

Politics and Economy.

The Organisation for Economic Co-operation and Development (OECD) describes the

interaction between economic and political sectors as the distribution of power and wealth

between different groups of society. They merge to generate, sustain and transform this

relationship in due course via Political economy analysis (PEA). Economists rely on politicians

to make policies and amendments. In contrast, politicians depend on economists to create a

national budget and give insights into the areas that need essential consideration in the budget.

Economists also advise the politicians on how on the measure to take to maintain the economic

sustainability and feasibility of a particular nation.

CONCLUSION

Public finance management offers a conclusive structure of triggering minds about public

finance states and solving issues relating to them. Equity, efficiency, and sustainability are the

principles that should be used in deciding how and where Government's limited resources would

be applied to ensure that the economy thrives to sustain future generations. Citizens of individual

nations should pay taxes to their Government to reduce the budget deficit to enable the

Government to fund their essential welfares. Consequently, Governments should evade excessive

borrowing as it leads to deterioration of the economy and the burden of heavy taxes to its

citizens. Public finance management is a crucial tool for any nation; if properly formulated and
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implemented, Governments would be able to monitor the progress of their economies easily,

know the loopholes to fill in their budget for the next financial year, and understand the

maximum revenue it can obtain to fund services that are vital run and effectively sustain the

economy. Public Finance management equips governments and institutions with information that

would influence their financial decisions on short and long-term goals that will yield high returns

on the input invested.

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References

Hein, E. (2019). Financialisation and tendencies towards stagnation: the role of macroeconomic

regime changes in the course of and after the financial and economic crisis 2007–

09. Cambridge Journal of Economics, 43(4), 975-999.

Domingues, A. R., Lozano, R., Ceulemans, K., & Ramos, T. B. (2017). Sustainability reporting

in public sector organisations: Exploring the relation between the reporting process and

organisational change management for sustainability. Journal of environmental

management, 192, 292-301.

Kenn-Ndubuisi, J. I. (2021). Rising External Debt Burden, Increase Financial Stability Risk; the

Need for Fiscal Adjustment in Nigeria.

Estevão, J., Lopes, J. D., Penela, D., & Soares, J. M. (2020). The Doing Business ranking and the

GDP. A qualitative study. Journal of Business Research, 115, 435-442.

Nasir, M. A., Yago, M., Soliman, A. M., & Wu, J. (2017). Institutional design, macroeconomic

policy coordination and implications for the financial sector in the UK. Journal of

Central Banking Theory and Practice, 6(3), 95-126.

Dhital, S. (2019). Global Financial Cycles and Macroeconomic Linkages. Available at SSRN

3354923.

Abdymomunov, A., Curti, F., & Mihov, A. (2020). US banking sector operational losses and the

macroeconomic environment. Journal of Money, Credit and Banking, 52(1), 115-144.

Borge, L. E., & Hopland, A. O. (2020). Less fiscal oversight, more adjustment. European

Journal of Political Economy, 63, 101893.

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Marfatia, H. (2020). Time-frequency linkages of international housing markets and

macroeconomic drivers. International Journal of Housing Markets and Analysis.

Granovetter, M. (2017). Society and economy. Harvard University Press.

Bleyen, P., Klimovský, D., Bouckaert, G., & Reichard, C. (2017). Linking budgeting to results?

Evidence about performance budgets in European municipalities based on a comparative

analytical model. Public Management Review, 19(7), 932-953.

Radovanović, M., & Lior, N. (2017). Sustainable economic–environmental planning in Southeast

Europe–beyond‐GDP and climate change emphases. Sustainable Development, 25(6),

580-594.