Welcome! In our Economics class today, we will be looking at an Overview of Public Finance! Do have a great moment studying with us!
Topic: Pubilc Finance
Period: Lesson I (Fiscal Policy, Government Revenue)
Lesson Objectives: By the end of the lesson, the learners should be able to:
- Explain the term public finance,
- State the objectives of public finance,
- Explain what a fiscal policy is all about and it’s objectives,
- Explain Government Revenue and Expenditure and also state their various types respectively.
Public Finance may simply be defined as the aspect of economics which deals with government revenue and expenditure. In other words, public finance involved the financial activities of government as they relate to revenue or income, expenditure and debt operation and their overall effect on the economy. It is seen as financial activities that concern borrowing and lending, receiving and spending by the federal, state, local governments and their agencies in order to create an impact on individuals and corporate bodies.
Objectives of Public Finance
i. Revenue generation: Public finance assists the government to achieve an effective and efficient generation of revenue for the nation.
ii. Improved balance of Payment: Public finance also helps government in ensuring favourable balance of payment.
iii. Price Stabilisation: Public finance helps to ensure the stability of prices of goods and services in order to prevent frequent fluctuations, and other related issues like inflation.
iv. Equitable distribution of income: Public finance also ensures that income accruing to a nation is equitably distributed to various sectors of the economy.
v. Good fiscal policy: Public finance is used by government to ensure that a good and acceptable fiscal policy is attained.
vi. Provision of employment: Public finance is used to create employment opportunities in the country.
vii. Satisfaction of needs: Public finance is also used to determine the needs of the people to enable government meet those needs.
Fiscal policy may be defined as the use of income and expenditure instruments or policies to control or regulate the economic activities in a country. It is a plan of action by government pertaining to the raising of revenue through taxation and other means and the pattern of expenditure to be applied. Some of the fiscal policies of the government are incorporated in the budget so as to help in directing economic activities in the country.
Objectives of fiscal policies
i. Economic development: A good fiscal policy can be used by government to ensure rapid economic development of a country.
ii. Revenue generation: Fiscal policy can equally be used to ensure that enough revenue is generated for government use.
iii. Creation of employment: A good fiscal policy can be used by government to provide job opportunities for the people.
iv. Industrial development: Industrial growth and development can be achieved through a well packaged fiscal policy by the government.
v. Income redistribution: Government can use fiscal policy to ensure that the wealth of the country is equitably distributed.
vi. Increased productivity: Productivity by workers can be increased if government can formulate good fiscal policy for the country.
vii. Control of inflation: Fiscal policy instruments can be used by government to control inflation in the country, e.g increased taxation on personal income, reduced government expenditure, etc.
Government or Public Revenue
Government or public revenue may be defined as the total income that accrues to all levels of administration (local, state and federal) or government from various sources. Government or public revenue includes capital revenue (or receipts) and current revenue.
Types of public revenue
i. Capital revenue (or receipts): Capital receipts, also called irregular or extraordinary sources of revenue, are sources of revenue used for meeting expenditure on heavy capital projects, e.g grants, loans, transfers, from current revenue etc.
ii. Recurrent revenue: Recurrent revenue is a regular source of revenue which is income received on a regular or yearly basis, e.g taxation, fees and licenses, fines and interests on loans, etc.
Sources of Government Revenue
i. Taxes: Taxes include both direct and indirect taxes. Government generates income or revenue by taxing individuals and corporate bodies.
ii. Loans: Government can obtain loans, from both internal and external sources, e.g the World Bank, etc.
iii. Grants and aids: Government can receive grants and aids as revenue from wealthy or developed countries.
iv. Licence: Government can generate revenue through licences, e.g driving licence.
v. Savings: Government can also generate revenue through savings, especially when a country has budget surplus.
vi. Rents and rates: Earnings from water, properties, housing, etc owned by the government are sources of income to the government
vii. Fees, Fines and Royalties: Government can generate revenue through court fees, mining companies, postage charges, etc.
viii. Earnings for government investments: Government can also earn income from government owned business enterprises or from joint ventures.
Government expenditure refers to total expenses incurred by public authorities at all levels of administration (local, state and federal) in the country. It includes recurrent expenses and capital expenses.
Classification of government expenditure
i. Capital expenditure: Capital expenditure are expenses on projects which are permanent in nature. They include money spent by government on building roads, schools, bridges, hospitals, industries and other permanent investments.
ii. Recurrent expenditure: Recurrent expenditure are those expenses which are repeated on yearly or regular basis. In this case, they are not permanent. Such expenditure include money spent on salaries, electricity bills, maintenance of infrastructures etc.
Objectives Or Main Aims of Government Expenditure
There are several objectives or aims which the government wants to achieve by spending money on different items. These items which government spend money on include:
1. General administration: Government spends money in maintaining
i. The civil service
ii. Various government
iii. Political appointees
iv. The armed forces and the police
v. The legislature
vi. The judiciary
vii. The embassies outside the country
viii. The executive
2. Economic services: These include expenditure on:
v. Power stations
vii. Forestry, etc
3. Social services: Government of every country usually large sums of money for the provision of social amenities to the people. Money spent on social amenities include:
i. Infrastructural facilities, e.g roads, airports and seaport, electricity, pipe borne, water, communication services, etc
iii. Health care delivery
v. Recreational Facilities
vi. Environmental sanitation
4. Transfer services: Government also spends money on items like:
i. Servicing of public debt
ii. Granting of loan to local authorities.
iii. Payment of pensions
iv. Love lent to friendly nations.
Factors Contributing to the Increase in Government Expenditure
Government Expenditure has continued to increase in recent times due to the following reasons or factors:
i. Population growth: As the population of a country grows, so will its public expenditure continue to increase.
ii. Inflation: Inflation can contribute to a rise in government expenditure as government spends more on projects and services.
iii. Unemployment: Attempts by government to combat unemployment usually increases government expenditure.
iv. Poverty: Attempts by government to alleviate poverty lend to increase to government expenditure.
v. Social security Payment: Rising social security payment has also led to an increase in government expenditure.
vi. Rise in national debt: Repayment or servicing of huge accumulated debts has increased government expenditure.
vii. Economic development: Government effort to keep pace with development in the country increases its expenditure, e.g expenditure on research and development of nuclear weapons.
viii. Cost of administration: A rise in the cost of general administration e.g increases in the salaries of civil servants consequently increases government expenditure.
Effects of Public Expenditure
i. Affects distribution of wealth: Some government expenditure help to redistribute income of wealth of the people. For example, the provision of free education, free medical care, low cost housing, etc will benefit the poor masses and by seeking help in alleviating poverty and redistribute wealth.
ii. Effects on employment: Government expenditure in the establishment of Industries and setting up of employment agencies would go a long way in generating employment opportunities for the people.
iii. Effects on production: Government expenditure in the establishment of Industries and increase in wages and salaries will provide increased income to individuals, which enable them to Haven higher purchasing power. This will lead to increased demand, which will influence producers to increase production.
iv. Even distribution or allocation of resources: Government expenditure also helps to allocate certain resources which are in abundance in certain areas to other areas where they are in short supply.
v. Effect on price level: When government increases its expenditure without a corresponding increase in output, this leads to high volume of money in circulation. This in turn may eventually lead to higher prices and inflation.
Done studying? See all our previous lessons in Economics
Take a quick test for this lesson
- Explain the term public finance.
- State the objectives of public finance.
- Explain what a fiscal policy is all about and it’s
- State the objectives of fiscal policy.
- Explain the term Government Revenue.
- Explain the term expenditure.
- What are the sources of government revenue?
- What are the factors contributing to the increase in government expenditure?
- State the effects of public expenditure.
Questions answered correctly? Kudos!!
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