Public finance is the management of a country’s revenue. The importance of public finance cannot be overemphasized.
Majorly, it analyses the impact of financial activities taken by the government on individuals and corporate bodies.
According to Wikipedia it is “the branch of economics that assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones”
This blog post provides an overview of how government finances are handled, the importance, scope of public finance, objectives and types of public finance.
What is public finance?
Prof. Dalton in his book Principles of Public Finance states that ‘Public finance is concerned with income and expenditure of government authorities and with the adjustment of one to the other.’
We can deduce from the above definition that government finance has to do with income and the way the government spends such income at any level – could be state, local or central.
However, public finance of recent vintage has a wider scope, it studies the impact policies set up by the government has on the economy.
Importance of public finance
Why is public finance important?
Majorly, the goal of public finance is to monitor and recognize when, how and why the government officials should intervene in the current economy.
Understanding certain roles played by the government and how changes may affect the economy are a few important aspects of public finance professionals.
We can’t ignore the fact that public finance is a very important aspect of the growth and development of a country.
Let’s take a deeper look into some of the importance of public finance:
1.It leads to economic growth:
It is very important tool to aid in achieving sustainable high economic growth rate.
The government makes use of of fiscal tools in order to increase aggregate demand and aggregate supply.
Fiscal policy tools can be defined as the tools used by the government in taxing and spending to expand or contract economic growth.
These tools include: public debt, public expenditure, taxes, etc.
2. Price stability
Government officials use public finance to overcome inflation and deflation.
How does this work?
During inflation they reduce the indirect taxes and genera expenditures but increases direct taxes and capital expenditure.
3. Economic stability
The government makes use of fiscal policy to stabilize the economy.
However, during a prosperous overflow of resources, the government increases tax and raises internal public debt.
The amount gotten is used to repay foreign debt and invention.
The internal expenditures are reduced and during a recession, reverse is the case.
Main sources of government finance
Government finance can be gotten from the sources listed below:
1.Direct taxes
They are paid to the government usually by households and companies to the government and other public agencies.
Examples include: income tax, payroll tax, corporate or public tax
2. Indirect taxes
They are paid to the government by public agencies via a third party (a retailer or supplier).
This tax is mostly based on what households or a company spends and it includes value-added tax, sales tax, and excise tax on alcohol and import duties.
3. Non-tax revenues
They are paid to the government by state-owned companies, including natural resource revenues such as oil and gas.
4. Charges and fees
The government also gets financing from charges, fees, and earnings.
Charges and fees are levied for publicly provided commodities (that is – goods and services), which are not public goods.
See also: FINANCIAL ACCOUNTING: Best practices and Detailed Guide (+free courses)
Scope of government finance
The scope of public finance refers to the operation of public finance. The scope of public finance refers to the methods government finances are gotten or used.
1.Public income
This refers to the income of the government. The government usually earns its income in two ways – tax and non tax income.
Tax income is gotten from the people of the country and it is paid in form of duties, sales tax, etc.
Non income tax includes interest income gotten from lending money to other countries, rent and income from government properties, donations gotten from world organizations, etc.
2. Public expenditure
It is the money government officials spends every year. The government uses its money on infrastructure, defense, education, healthcare, etc.
3. Public debt
Public debt occurs when public expenditure exceeds public income, and the government fills the gap by borrowing money from the public or from organizations like the World Bank.
Objectives of government finance
What are the main objectives of government finance? Lets take a look at some of them below:
1.Equitable distribution of wealth
Government finance helps in distributing a country’s wealth among the individuals and various sections of the country.
2. Allocation of resources
Government finance aids the allocation of resources among the government and private entities in a country.
3. It aids in the provision of employment opportunities.
Government finance aims to provide an environment that provides employment opportunities for its citizenry.
Above are the top 3 objectives of public finance.
Let’s move on to the types of public finance:
Read More: FINANCIAL INCLUSION: Overview, Importance, Objectives, Examples (+ Free PDFs)
Types of government finance
The major types of government finance include:
1.Public revenue
This is the money the government from tax and non tax sources, to enable the government undertake expenditures.
2. Public expenditure
This is the money the government of a country spends on the needs and wants of the citizens in a country such as pension, provisions, security, infrastructure, etc.
3. Public debt
This is the difference between governments revenue and government expenditure in a country.
4. Financial administration
Financial administration deals with the task of handling financial taxes in a country, company or organization.
It includes: controlling the budget, writing financial reports, providing money for projects, etc.
4. Public budgeting
This is a field of public administration that involves monitoring how much is spent by the government each year, preparation of budgets, etc.
Public finance examples
The examples of government finance are: public revenue (gotten from tax and non tax sources), public expenditure, public budgeting, public debt and financial administration.
Public finance pdfs
Below is a list of PDFs that will explain the concept of government finance in clearer terms.
Click on the links to download immediately.
1.Public finance: Concept, Definition, and Importance for Country’s Development by Research Gate.
2. Public Finance – Basic concepts, Ties and Aspects.
3. Public Finance and public policy: A new textbook by Research Gate
What forms of public finances exist?
We determined that the Types of public finance are classified into four categories: Public Expenditure, Public Revenue, Public Debt, and Financial Administration. The purpose of these categories is to determine how the government might develop, maintain, or intervene in the current economy.
What are the three essential components of public finance?
Commonly, the term “public financial management” refers to components of an annual budget cycle, which typically revolves around (1) budget development; (2) budget implementation; (3) accounting and reporting; and (4) external security and audit. The aims of the PFM system are supported by a broad consensus.
What are Nigeria’s public finances like?
Public finance is the administration of a nation’s revenue, expenditures, and debt burden by various government and quasi-government institutions.
What are the objectives of public finance?
Public finance is the study of government activities, including expenditures, deficits, and taxation. The objectives of public finance are to recognize when, how, and why the government should engage in the current economy, as well as to comprehend the potential consequences of market developments.
What four functions does public finance serve?
Taxation, government expenditures, budget procedure, and public debt are the four main components of public finance.
What are the five 5 components of government finance?
The evaluations are centered on five aspects: planning, budgeting, implementation, monitoring, and evaluation. The objective of these activities is to help governments improve their financial management systems.
Was this article helpful? Hit the share button! Cheers!
