Class PPT Designs

Public Finance
Mohammad Halim Stanikzai
CONTACTS 0707222222 | info@dunya.edu.af | www.dunya.edu.af

Finance
• Personal Finance: Financial planning involves analyzing the current financial
position of individuals to formulate strategies for future needs within financial
constraints.
• Corporate Finance: Corporate finance refers to the financial activities related to
running a corporation, usually with a division or department set up to oversee
those financial activities.
• Public Finance: Public finance includes taxing, spending, budgeting, and debt-
issuance policies that affect how a government pays for the services it provides
to the public. It is a part of fiscal policy.
• International Finance: monetary interactions between two or more countries,
focusing on areas such as foreign direct investment and currency exchange rates.
Meaning and Scope of Public Finance
• Meaning:
– Public Finance means the finances of the government, so it is also called
“Government Finance)
• According to Grooves” Public Finance is a field of enquiry that treats the income
and outgo of the government (Federal, state and local).”
• According to Taylor, “Public finance deals with the finances of the public as an
organized group under the institution of government.”
Fundamental Principles of Public Finance
Why do public managers, whether they work for the government or for a not-for-profit
organization, need to study public budgeting and finance?
1. They must make choices about how resources are utilized and working through the
finances gives a good start in organizing the options.
2. They operate in the public trust and need to be able to control the use of public
resources.
3. They need to make sure they don’t run out of money before they run out of the service
that needs to be provided.
4. They need to make a case for the resources appropriate to provide services to their
residents and clients to legislative and executive bodies.
5. They need to understand the case being made by other managers.
6. They don’t want to go to jail for misuse of resources that belong to the public or to
their organization.
7. The people in any organization who actually understand what the organization is
doing are the people who understand the finances of the organization.
8. Not-for-profit organizations frequently have terrible financial management practices

in place.
9. It is simply fun to understand what is going on in public organizations, and

understanding finance is the most important single step in gaining that understanding.
•Governments differ from private businesses in terms of resource constraints,
ownership, and objectives. Three important differences exist: governments may
tax to enlarge their resources; “ownership” of the government is not clear because
many stakeholders share a legitimate interest in government decisions; and the
value of government services is neither easy to quantify nor reflected in a single
measure (like the sales or profits of a business enterprise).
•Many different organizations—private businesses, nonprofit organizations, and
governmental agencies—provide the goods and services that we use every day,
including both those necessary for life itself and those that make life more enjoyable.
•What goods are provided by the Private Business?
•What goods are provided by the NGOs?
•What goods are provided by the Governmental agencies?
– Market Failure and the Functions of Government
•Why can’t private businesses selling their products in free markets be relied upon to
provide all goods and services that ought to be available?
1.Poor Quality.
2.Merit Goods
3.Excessive Power of Firms. ...
4.Unemployment and Inequality.
Scope of Public Finance
• Public finance is one of the most important branches of economy. It
highlights the role and functions of the government. Government has to
perform various functions like protection from external attack, generation of
employment, protection of property, maintaining law and order, provision of
collective needs, etc.
• To perform these functions efficiently, any government needs finance which
can be received from various sources. Public finance deals with the study of
principles of income and expense of the government.
The Components or Scope of Public Finance:

•(A) Public Expenditure: It refers to that expenditure which is incurred by the
public authority (Central, State and Local Government) for promoting economic
and social welfare of a country.
Public expenditure is classified as follows:
a) Revenue Expenditure: It refers to expenditure on day-to-day functioning of
the government. E.g., administration cost, salary allowances and pensions
of government employees, etc. It is incurred regularly but it does not create
any assets to government.
b) Capital Expenditure: It refers to the expenditure for the development of a

country. E.g., investment by government in projects, provision of
infrastructure, repayment of loan, etc. It does not incur regularly but it
makes addition to the assets of the economy.
c) Developmental Expenditure (Planned Exp): It refers to that expenditure
of the government, which gives productive impact to the economy. It results
into generation of employment, increase in production, etc.
d) Non-developmental Expenditure (Unplanned Exp): It refers to that
government expenditure which does not yield any direct productive impact
on the economy. E.g., Covid19 Expenditure, war expenditure. It is
unproductive in nature.
(B) Public Revenue: It refers to aggregate collection of income with the

government through various sources.
They are classified as:
a) Tax Revenue
b) Non-tax Revenue
Tax Revenue: There are two types of taxes collected by the government. They
are as follows:
Direct tax: Direct tax is that tax which is paid by a person on whom it is legally
s imposed. E.g. income tax, wealth tax, etc.
•Direct tax can be proportionate – (constant rate of tax on all incomes),
progressive (rate of tax increases with an increase in income) or regressive
(rate of tax declines) with rise in income. In India, we have progressive tax rate
system.
Indirect tax: Indirect tax is that tax which ( is imposed on one person but can
be paid by the other, e.g. GST.
A taxpayer cannot shift the burden of direct tax to others, however, in case of
indirect tax, tax burden can be shifted to others.
Tax is imposed on income, property or commodities and services.

Types of Taxes:
(1) Direct Tax: It is paid by the taxpayer on his income and property. A taxpayer
cannot transfer the burden of direct tax to others. Impact and incidence of direct
tax falls on the same person. E.g., Income tax, wealth tax, etc.
•Direct taxes are further classified into three categories.
(i) Proportionate tax
(ii) Progressive tax
(iii) Regressive tax
(2) Indirect Tax: It is levied on goods and services. It is paid at the time of
production or sale and purchase of a commodity or a service.
•The burden of indirect tax can be shifted by the taxpayer (producers) to other
persons.
•Hence, impact and incidence of tax are on others. E.g., GST.
• Thus, major share of public revenue is the contribution by tax revenue in
India.
(b) Non-tax Revenue: Non-tax revenue refers to the revenue received by the
government from various sources other than taxes. E.g.; toll tax, fines
•Public expenditure is an important aspect which is incurred by the public
authority (central, state and local government).
•Public expenditure is required for the protection of the citizens of a country, for
satisfying social needs or collective needs and for promoting social and
economic welfare of the people in a country.
Tax is a major source of revenue to the Government:

•According to Prof. Taussig, “The essence of a tax as distinguished from other
charges by government is the absence of a direct ‘quid pro quo’ (benefit)
between the taxpayer and the public authority.”
•Prof. Seligman states that, “a tax is a compulsory contribution from a person to
the government, without reference to special benefits confessed.”
• Thus, every citizen of a country is legally bound to pay tax.
(C) Public Debt:
Total Public Debt

1) Domestic Debt
2) External Public Debt
1) Short Term debt
2) Long term Debt
3) Use of IMF
Credit
(D) Fiscal Policy: It is the means through which government adjusts its
spending’s and tax rates. It helps to monitor and influence nation’s economy. It
deals with public expenditure, public revenue, and public debt.
•Thus, it is the financial policy implemented by the government.
(E) Financial Administration: It implies an efficient implementation of revenue,
external and debt policy of the government. It includes preparation and
implementation of the government budget along with overall economic growth
of a country.
• Budgetary actions of the government affect production, size and distribution
of income and utilization of material and human resources of a country.
Thus, the scope of public finance is important in a modern economy.
Public Finance V/S Private Finance
Private Finance Public Finance
1) Micro Level Macro Level
2) Private Business adjusts its expenditure Government adjusts its revenue to its
to its income. derived scale of expenditure.
3) Taxing power is not available in private Taxing power is available for public
finance finance
4) Sources of income of expenditure are Sources of income and Expenditure are
limited (less) comparatively more.
5) Its main objective is to promote Its main objective is to promote general
personal satisfaction or utility. welfare.
6) Budget is of low amount Budget is of huge amount.
Concept of New Public Finance
• Public finance today is about more than taxing and spending public revenue.
• It involves channelizing resources to public policy goals. In this process government

uses its fiscal and regulatory tools to encourage and complement private activities
and private spending on these goods.
• Public Finance is expected to perform its traditional duty of providing public goods.
• The global issue of today’s public finance is; however, to provide global public
goods (i.e.; goods, whose benefits and costs are strongly universal across countries,
people and generation) and global equity in development.
Public Goods and Private Goods
• Human wants are mainspring of economic activity.
• Wants can be classified into private and public wants.
• Public wants are those wants which are provided through government budget and
goods which satisfy. Public wants are known as public goods.
• Private wants are the wants of individual consumer and goods which fulfill private
wants are known as private goods.
Public Goods and Private Goods
Public Goods Private Goods
Produced by government Produced by private firms
Non-rivalry in nature (consumption by one Rivalry in nature (consumption by one
does not stop other from consuming it.) can stop the other from consuming it).
e.g. defense (to safeguard all individual
Non-excludable (no way to stop people from Excludable (if you can’t pay, you don’t
receiving it, whether they pay or not) get it)
e.g. National Defense, Law Enforcement…. e.g. Food and Drink, computer system..
Social Goods
• Social goods are those goods which are provided by the state because their
consumption is non-rival and exclusion principle is in applicable.
• Benefits accruing from them are external.
• Good examples are defense, law and order, urban parks, etc
• It is to be noted that social goods are subject to the principle of consumer

sovereignty, i.e, they are produced on the basis of individual preferences.
• In spite of the technical distinction between public and social goods (the latter is
only a part of the former, the two are often used interchangeable.
Merit Goods and Demerit Goods
• Merit goods are the goods that are provided generally by the government to certain
sections of the society.
• Unlike in the case of pure public goods, the merit goods are not provided to the
entire society, rather they are given to certain targeted people.
• An example of the merit good is subsidy in necessity goods to the poor, seeds to the
framers.
• Poor people may under-consume most of the merit goods because of their inability
to pay. To counter this under-consumption, the government either subsidies them
and marked them completely free. In this way, consumption does not depend on the
ability to pay the consumer.
Features of Merit Goods
1) Merit goods are not provided on the basis of consumer’s preference, rather they are
given by the government on its own preference.
2) Merit goods are given by the government for a particular section of the society.
3) Merit goods produces positive externalities.
e.g. primary education, basic health care, life insurance to the poor people, etc.
Features of Merit Goods
The report by the national institute of public finance and policy titled “Central
Government subsidies in India”, classifies merit goods under two categories
- Merit I and Merit II, in terms of their priority.
Merit I: Elementary education, primary health-care, prevention and control of
diseases, social welfare, nutrition, soil and water conservation, ecology and
environment.
Merit II: Education (other than elementary), sports and Youth services, family welfare,
urban development, Forestry, agriculture resources, land reforms, etc…
Demerit Goods
• A demerit good is a good whose consumption leaves a negative impact on its
consumer and on others in the society.
• e.g. Alcohol, Tobacco, etc
• Demerit goods have negative externalities.

• Demerit goods are those goods which are deemed to be bad and so their
consumption is therefore discouraged by the state.
Mixed Goods
• The combination of public goods and private goods are known as Mixed Goods.
• Keeping in view the mixed cases, goods and services can be divided into four
categories:
1. Pure Private Goods
1) Pure private Goods: 2. Partial Private Goods
1) No Externality 3. Partial Public Goods
2) Low Cost exclusion 4. Pure Public Goods
3) E.g. Food, Clothing, Cars
Mixed Goods
2) Partial private Goods (Private Goods with Externalities):
1) External benefits when produced or consumed.
2) Low cost exclusion
3) E.g. Private schools, private hospitals, transport, public hospitals, etc.
Mixed Goods
3) Partial Public Goods :
1) Collectively consumed
2) Benefits subject to crowding
3) Possibility of exclusion
4) E.g. clubs, theatres, amusement parks, Pay TV, Public golf
Mixed Goods
4) Pure Public Goods :
1) Collectively consumed
2) Benefits not subject to crowding
3) Non-excludable
4) E.g. Defense, policy protection , etc.
Clubs Goods: A good which has done degree of non-rivalry but for which
excludability is possible is called a club good.
• Examples of club goods include, cinemas, cable television, access to
copyrighted works, and the services provided by social or religious clubs to
their members.
Local Public Goods: A local public good is that good that can provide benefit to
those within a geographical area. It may be non-rivalries within that area but may be
rivalrous outside that area.
Regional Public Goods: Regional public goods are those goods whose benefits are
costs span some or all countries with a geographic region.
Global Public Goods: Global public goods are those goods whose benefits or costs
are strongly universal across countries, people and generations.
- Air, water, etc. there is no such example that applied under GPG
Regional Public Goods: Regional public goods are those goods whose benefits are
costs span some or all countries with a geographic region.
Global Public Goods: Global public goods are those goods whose benefits or costs
are strongly universal across countries, people and generations.
- Air, water, etc. there is no such example that applied under GPG
Principle of Maximum Social Advantage
“The very best of all plans of finance is to spend little and the best of all taxes is that
which is least in amount.”
It is not correct to say that “every tax is evil”. Similarly, it is not correct to say that “all
public expenditure is good.”
e.g.
• A tax on Alcohol, which raises its price and thereby diminishes its consumption,
may be a good tax.
• Similarly, public expenditure on unnecessary wars is on obvious evil.
It is in accordance with the above view: Dalton says that if Public Finance is to be
treated as a branch of science, economics or politics, one fundamental principle must
like at the root of it and that principle is “Principle of Maximum social advantage:
Explanation: Dalton proposes a broader formulation of the principle of taxation in

which he considers taxation as well as public expenditure.
This principle is the principle of Maximum Social Advantage or simply the Principle of
Marginalism.
While explaining this principle, Dalton says the most operations of public finance lead
to series of transfer of purchasing power.
In the form of Statement:
These transfers are made, by taxation otherwise, from certain individuals to public
authorities and back again from these authorities to other individuals by way of Public
expenditure.
So, Dalton defines the principle of maximum social advantage as the best system of
public finance since it secures the maximum social advantage from the operations
which it conduct.
He says further that this principle is obvious, simple and far reaching, though its
practical application is often very difficult.
Public Finance is such which gives maximum social
advantage to the public.
Limitations of Social Advantage
The Principle of Maximum Social Advantage suffers from following shortcomings /
Limitations:
1) There is no effective means of quantifying utility and disutility.
2) Equating of Marginal Utility and Disutility is spoken for the “society as a whole”,
not “Individual members” of the society.
3) The utility of public expenditure is a Macro concept while the disutility of taxation
is Micro Concept and the comparison of the two is methodologically wrong.
Externalities
Assumptions:
1) All costs are borne fully by decision makers (market participants).
2) All Benefits are realized fully by decision makers.
3) Markets work! Goods and services are allocated efficiently.
4) But what happens when there are effects on bystanders (their parties)??
Externalities
• We have assuming that all costs are private costs, incurred solely by the decision-
makers.
• But for some activities there are external effects.
• These are costs or benefits incurred by those other than the consumer or producer
actually trading in the market.
• The sum of the private costs and external effects is the true social cost of an
activity.
Externalities
Problem:
• When private decision-makers ignore external costs, we get market failure.
• The market will fail to achieve efficiency.
Externalities
We have a special name for these external effects, Externalities.
• Externalities are bystander effects- they affect other people beyond the immediate
market participant (buyers and sellers)
• Externalities are byproducts of some other primary activity.
• Whenever there’s an externality present we first identify the primary activity, then
the bystanders and external effects.
Externalities
• It’s important not to confuse “externalities” with “effects”
• Externalities require bystanders
• Ex. Smoking is a primary activity that causes an externality secondhand smoke.
– There are other harmful effects from smoking e.g. risk of premature death but
this is not an externality because it’s mainly affecting the decision-maker
themselves.
Externalities
• Externalities can be positive or negative depending on how they affect Social
Surplus.
• Social Surplus is the sum of consumer, producer, and everyone else’s surplus.
• True social surplus includes the effect on bystanders.
Positive Externalities
• A positive externality exists when an activity carries an external benefit.
• Here social surplus is larger than individual surplus from just the decision-maker.
• There’s the ordinary benefit to the decision-maker but there’s additional benefits to
bystanders.
• Problem: Since the individual does not receive the full benefit of the action, and
probably doesn’t even observe the full benefit, they do less than optimal.
Positive Externality Market Failure under provision
P=12-2Q
P=15-2Q
Negative Externalities
• A negative externality exist when an activity carries an external cost.
• Here social surplus is smaller than individual surplus.
• There’s the cost to the decisionmaker plus the additional harm that impacts
bystanders.
• Here the individual does not incur the full cost of the action nor do they often even
observe it, so they do more than optimal.
Externalities
In the presence of externalities, the market outcome will be inefficient – we will get too
large a quantity or too small according to whether the externality is negative or
positive.
• Recall, the efficient quantity is the quantity that maximizes social surplus. Q efficient
• When a positive externality is present the market quantity is smaller than the
efficient quantity, Qmarket < Qefficient
• When a negative externality is present, the market quantity is larger than the
efficient quantity, Qmarket > Qefficient
Externalities
How it could be accomplished:
• In these cases of market failure, government action might be able to restore the
market to the efficient equilibrium.
• This may be done through taxes or subsidies.
• Ex. We typically understand the social benefit of education to be larger than the
individual benefit, so the government tries to subsidize education in order to help
individuals attain the socially desireble level.
Externalities
How it could be accomplished:
• In the case of negative externalities, the government might impose a corrective tax.
• Pigouvian Tax named after economist Arthur C.Pigou (1877-1959) are applied to
help internalize externality.
• The idea is that when the decisionmaker faces the cost of the action plus the
Pigouvian tax, the total cost to the decisionmaker more closely matches the true
social cost of the action. (such like gasoline tax)
• This leads the decisionmaker to optimally set a lower level of the action.
Externalities
• Similarly, a corrective subsidy can incentivize greater private consumption in the
case of a positive externality.
• As with the negative externality and the tax in this case the social optimum is
achieved when:
Positive externality = Corrective Subsidy

Government Budget / Public Budget
“government Budget is an annual statement, showing item wise estimates of the
government receipts and government expenditure during the period of one financial year.”
Objectives of the Government Budget

1. GDP Growth;
2. Balanced regional growth;
3. Reallocation of resources;
4. Redistribution of Income and Wealth;
5. Employment opportunities; and
6. Economic Stability.
Assignment
Afghanistan Budget components
Kinds of Budget
1) Executive and Legislative Budgets:- A legislative Budget is prepared by the
various committees appointed by the legislature from among its members. An
executive budget, on the other hand, is the one which is prepared by the executive
branch of the government. Such a budget is normally passed and adopted by the
legislature but the initiative is in the hand of government.
2) Multiple and unified budgets: - In the conventional budget, revenue and
expenditure are shown on accrual basis and those flows of funds are excluded
which do not belong to the government. In the cash budget, all the flows of funds to
and from the government on actual payment basis are shown, inclusive of funds
which are not owned by the government..
Kinds of Budget
3) Conventional and Cash Budget:- In the conventional budget, revenue and expenditure are
shown on accrual basis and those flows of funds are excluded which do not belong to the
government. In the cash budget, all the flows of funds to and from the government on actual
payment basis are shown, inclusive of funds which are not owned by the government.
4) Revenue and Capital budgets:- It consists of the revenue receipts both tax-revenue and non-
tax revenue and the expenditure met out of the revenue receipts. Revenue expenditure is further
divide
It comprises capital receipts and capital expenditures of the government. Capital receipts include
market loans, borrowing from DAB and others. Capital receipts of the government are those
which create liability or reduce financial assets, while those expenditures of government which
lead to the creation of physical or financial assets or reduction in recurring financial liabilities
fall under the category of capital expenditure. into plan and non plan revenue expenditure..
Techniques of Budget
1) PPBS (Program and Performance Budgeting System):
2) ZBB (Zero Base Budgeting:
PPBS (Programe and Performance Budgeting System): The term performance
budget was made popular by an official US Commission (Hoover Commission) that
reported in 1949.
It recommended for a change in emphasis in budgeting from inputs (measured in

money terms) to outputs (measured in physical terms) where feasible.
This system of budgeting was first applied in the US Department of Defense.

In the mid-fifties, the second Hoover Commission in the US coined the term
“Programme Budgeting”.
The new approach as embodied in the term PPBS (Planning-Programming Budgeting

System) was adopted by the US Defense Department.
The main objective of PPBS was to rationalize the policy making.

The main difference between the Performance Budgeting and Programme
Budgeting is that the first uses the techniques of cost accounting and Scientific
management, while the second uses economies and system analysis.
The Indian Administrative Reforms commission defines a performance budget as “a

technique for presenting government operations in the form of functions, programmes,
activities and projects.
Performance budget involves the following five statges:
1) Objectives
2) Analysis
3) Budget classification (possible if)
4) Organizing (Allocation of resources)
5) Evaluation. (controlling)
PPBS was adopted in some form in a number of countries.
PPBS was adopted in some form in a number of countries. Many developed countries such as
Australia, Austria, Belgium, Canada, France, Japan, New Zealand, Norway, the UK and the USA
introduced some elements of PPBS. Many developing countries including Korea, Malaysia, the
Philippines, Sri-Lanka, India, Honduras, Guatemala, Panama, Paraguay, Ghana and Botswana
also adopted it.
The experience with PPBS has been disappointing and it had been so far the following
reasons:
1) It proved to be hard to define programmes and relate them to national objectives
because an activity often serves several purposes and is viewed differently by
various officials and interest groups.
2) The measurement of output is fairly easy in some activities but almost impossible
for traditional function such as Law and Order, defence, foreign relations etc.
3) It is not possible to consider a wide range of alternative ways of attaining ends
(Objectives) in most cases.
ZBB (Zero Base Budgeting: The term performance budget was made popular by an
official US Commission (Hoover Commission) that reported in 1949.
It recommended for a change in emphasis in budgeting from inputs (measured in

money terms) to outputs (measured in physical terms) where feasible.
This system of budgeting was first applied in the US Department of Defense.

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Public Finance

Mohammad Halim Stanikzai

CONTACTS 0707222222 | info@dunya.edu.af | www.dunya.edu.af

8. Not-for-profit organizations frequently have terrible financial management practices

9. It is simply fun to understand what is going on in public organizations, and

The Components or Scope of Public Finance:

b) Capital Expenditure: It refers to the expenditure for the development of a

(B) Public Revenue: It refers to aggregate collection of income with the

Tax is imposed on income, property or commodities and services.

Tax is a major source of revenue to the Government:

Total Public Debt

• It involves channelizing resources to public policy goals. In this process government

• It is to be noted that social goods are subject to the principle of consumer

• Demerit goods have negative externalities.

Explanation: Dalton proposes a broader formulation of the principle of taxation in

Positive externality = Corrective Subsidy

Objectives of the Government Budget

It recommended for a change in emphasis in budgeting from inputs (measured in

This system of budgeting was first applied in the US Department of Defense.

The new approach as embodied in the term PPBS (Planning-Programming Budgeting

The main objective of PPBS was to rationalize the policy making.

The Indian Administrative Reforms commission defines a performance budget as “a

It recommended for a change in emphasis in budgeting from inputs (measured in

This system of budgeting was first applied in the US Department of Defense.

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