The management of a country’s revenue, expenditure, and debt load can be reviewed through various government and quasi-government institutions. The prices are placed under public finance. Every nation on the planet has a system of putting together and distributing public resources. Public finance seems more something to with financial institutions, which it is, but it’s mostly applied through the economic process. It is one of the most important aspects of economic growth and development, which is why it’s important to study it. This guide provides you with an analysis of the principles of public finance, helping you get a better understanding of the whole subject.
It is vital to note that this is a wide topic that might take you a while to get a clearer understanding. There are many components to public finance to learn before getting into these principles. Basically, we are discussing public finance using economic theory. This is because we can evaluate the position of a country’s finances just in the same manner as analysing business statements.
We live in a world with limited resources, yet human needs depend on these resources and keep growing. As such, the state is mandated with sharing these few resources to make sure that everyone gets access to something that makes them live a happier life. It is, therefore, safe to say that public finance is all about accountability for public funds. When people pay their taxes, they expect to get a good report of how their money has been used, enabling them to have more faith in the government. Besides, public finance is necessary for making many political and other government-related decisions. Both fiscal and monetary policies are established on public finance. Looking at a country’s finance makes it easy to know its economic position and whether they are growing in the right direction.
Components of public finance
Activities related to revenue collection, expenditure to support the society, and implementation of financing strategies are the main components of public finance or built on this foundation. The government is responsible for the well-being of its citizens. It would be hard for any economy to grow without public finance. In other words, it forms the pillar and foundation of economic development. And it is the government that has the responsibility to deliver good services for financial accountability. It uses different bodies that work under the following component:
A government collects taxes from individuals and firms as a way to get the revenues needed in running government activities. Every coin that the government spends comes main from taxes, although there are many other sources of revenue. Apart from serving as a source of revenue, taxing is one way the government ensures people behave in a certain desirable way. They are made responsible by taking part in the building of a nation. The economic theory suggests that every person’s main goal on the planet is to lead a happy life. In this case, they need security both financially and physically. Good economic standing is an indication of a possible good life for the people within that economy.
Taxes are used in running government activities and projects. The main areas you find public resources in use include schools, health care facilities, social funds, and social security. These taxes come as income tax ( a type of progressive tax, estate tax, and property tax. This category also has some other sources of revenue, which include duties and tariffs on imports and revenue from other types of public services that are charged.
At the start of every financial year, the ministry of finance releases a budget with an allocation of funds for different projects. A budget carries the plan of what the government intends to spend within that financial year. It is among the most important things every citizen hopes for because they get to know the type of activities the government is planning for them. For instance, in the U.S., the president submits a budget request to Congress, the House, and the Senate to create bills for selected parts of the budget. The president then signs them into law, and they are used to run the government’s expenditure for the year that follows.
After collecting taxes, the government creates a budget for its use, which is detailed in expenditures. Expenditure can be defined as everything and anything the government actually spends money on. Things such as social programs, education, health, and infrastructure are all under government expenditure. It can be simply what the government does to ensure a good life for its citizens. A lot of government spending comes in the form of wealth and income redistribution, which aims to benefit the whole society. For example, the government may lay high taxes on the rich so it can have money to support the poor and ensure everyone is leading a better life. Sometimes the actual spending may rise above or fall below the set budget. It depends on what happens during those years and what the government does to ensure equality in the distribution of resources.
Deficit and surplus
As stated above, sometimes the government may spend more than it had budgeted for, hence, creating a deficit for that year. And if the government spends more, there is said to be a surplus. A deficit may indicate a more aggressive economic growth, that perhaps there were more projects the government go involved in to boost the national economy. A surplus may also be good since it means there are more funds to allocate for the following year.
Where does the government get the money to spend on more projects if there is a deficit? Policymakers cannot sit down in the middle of the year and set another budget. Hence, the government is compelled to borrow money and issue a national debt. In the USA, the Treasury issues the national debt. And in case of a deficit, the Office of Debt Management makes the decision to sell government securities to investors. In this case, the government has all the powers to make the right decisions to take the nation forward through economic cycles.
Management of Public finance
Another crucial question we need to answer is how the government manages public finance. It is easy to collect revenues through taxing and other means, but putting the same funds into good use is another thing. An economy is doomed if there is no proper guideline for managing public finance. In this case, a government will need three main sources of data to determine how much is needed to spend on specific areas of the economy. These include revenue, expenditure, and borrowing/dating. Revenue or tax collection is the source of cash for the government. A proper taxing system is needed to ensure every cent collected is channelled to the correct bodies. A government does not run on its own but through the hands and boost of its citizens.
Once the money has been collected, policymakers can then sit down and come up with ways of making good use of the funds. Expenditures are the representation of how this money is used. And if the expenditure goes above the projected budget, a deficit is created, which the government pays back through the next year’s revenue. In case there is less expensive than the projected budget, a surplus. This is the difference between revenue and expenditure, which is funded with the national debt.
Let us look at one example – the U.S. figure in 2017. The total revenue collected during this period was approximately $3.3 trillion. The total spending was at $3.97 trillion, creating a deficit of $665 billion.
This information can be found on the U.S. government revenue site. As you can see, these are public figures and information that anyone can access at any given time. It is the only way the government can take responsibility for what they can create good citizenship.
Cause of development
Public funding develops from the state’s intention to soften the limitations that come from economic decisions from individual entities like households and firms. In this case, the government intends to make it easy for these entities to make independent decisions to boost the economy and improve their lives. The government will use fiscal tools, which include public revenue and expenditure, to achieve this goal.
Certain behaviour of these parties can be classified under the “quasi-fiscal funding principle.” Here, the public-law gods and services receive funding from off-budgetary resources. For instance, the Czech Republic’s public-law television is funded by the fees that come from T.V. licensing.
Market failure is another crucial term relating to public finance that you should be aware of. Markets are the main pillars of an economy because the demand and supply of goods happen. This system follows supply and demand using the price mechanism. A well-developed market creates a good relationship between people and companies, ensuring they mutually benefit from each other. Even so, each entity strives to satisfy its own benefit. The strongest benefit comes from a good balance of optimum conditions within the market. If a system reaches the optimum that can be considered efficient, fair, and stable, such is considered the Pareto optimum. In case every entity has reached its peak, and none can improve their positions without making things worse for the other entity. In other words, one entity can only improve its position by depriving the other. For instance, if the firm intends to make more profit, they would have to increase the prices of their goods, which, in turn, affects demand because now fewer people will be willing to buy.
We have mentioned efficiency, stability, and fairness, which are the most crucial in economic development. Efficiency connects to the other elements through microeconomics, stability through macroeconomics, and fairness through sciences outside economics. Fairness is not directly linked to economics, but it can be investigated through other science. Consider deontological and Kantianism, for instance. These are the two theories in economics that can be used to understand human behaviour. They all agree that people should behave in ways that only improve other people’s lives by avoiding anything that can hurt others. They should make decisions for the common good of society and behave in ways that are ethically correct.
There must exist conditions for achieving market-efficient solutions. If non exist, or if the ones that exist are violated in an ant manner and for any reason, there will be a market failure. It can be because of any of the following reasons:
1. That there is no efficient allocation of resources. Perhaps one aspect of the market gets less than what is needed.
2. That the economy in the aspect of macroeconomics indicators oscillates around the desired aspects and
3. That wealth distribution and income have diverged from the agreement on fairness.
If these conditions happen, and the market is threatened, it remains for the state to perform its public finance function (fiscal function) in each area so that it can stop or reduce this market failure. More than anything else, the microeconomic failures from the stabilization function perspective, and the redistribution function then go to the area of the failure that comes from outside economies. In perfect competition, failing to meet the desired conditions can lead to a malfunction in the price mechanism.
As you can see, public finance is a necessary and very crucial aspect of economic development. If a government fails to have proper strategies in place to handle issues that arise from the monetary process, it fails to assure stable economic growth. The three principles that define public finance are:
1. Non-optional. The law forces economic entities to contribute to the joint budget of the national or local authorities. However, contributors are not guaranteed to get a sufficient supply of public commodities.
2. Non-refundable. Here, there is no application of the “quid pro quo” relationship in other finance or trade transactions. It is not certain whether the expected amount will be returned to the entity.
3. Non-equivalent. The parties may be contributing to a joint fund, but the benefits from the means they use may not be equivalent to what is invested in the means. A clearer explanation would be that poor households contribute less and yet receive a large share of the public sector’s goods provided to them.