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1 - Basic Principles of PF

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24 views21 pages

1 - Basic Principles of PF

Uploaded by

maryakang722
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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INTRODUCTION:

PUBLIC FINANCE
LESSON 1 & 2
DEFINITION OF PUBLIC FINANCE

Public finance refers to the branch of economics that


studies the role of the government in the economy,
particularly how it raises funds, allocates resources, and
manages its expenditures to achieve economic and
social objectives.

It involves the analysis of various financial activities and


policies pursued by governments at different levels
(national, state, local) to ensure the efficient functioning
of the economy and the well-being of its citizens.
SCOPE OF PUBLIC FINANCE

The scope of public finance is dynamic and


evolves in response to changing economic
conditions, societal needs, and technological
advancements. It plays a vital role in shaping
economic policies that impact individuals,
businesses, and the overall health of
economies.
PUBLIC REVENUE

Taxation
Study of various types of taxes (income tax, sales tax, property
tax, etc.), tax principles, tax structures, and their impact on
incentives and economic behavior.

Non-Tax Revenue
Examination of government income from sources other than
taxes, such as fees, fines, royalties, and profits from state-owned
enterprises.
PUBLIC EXPENDITURE

Public Goods and Services


Analysis of government provision of goods and services that
benefit society as a whole, such as infrastructure, defense,
education, and healthcare.

Social Welfare Programs


Study of government initiatives aimed at providing assistance to
vulnerable populations, like unemployment benefits, welfare
programs, and food subsidies.
BUDGETING AND FISCAL POLICY

Budget Formulation
Understanding the process of creating government budgets,
setting priorities, and allocating resources to different
sectors.

Fiscal Policy
Analysis of how changes in government spending and
taxation influence economic growth, inflation,
unemployment, and overall macroeconomic stability.
PUBLIC DEBT AND DEFICITS

Public Debt Management


Examination of government borrowing practices, issuance of
bonds, and strategies to manage and reduce public debt.

Budget Deficits and Surpluses


Study of the consequences of running budget deficits (when
expenditures exceed revenues) and surpluses (when revenues
exceed expenditures).
INCOME DISTRIBUTION AND EQUITY

Redistribution
Analysis of government policies designed to reduce income and wealth
inequality through progressive taxation and social programs.

Poverty Alleviation
Study of programs aimed at lifting individuals and families out of
poverty, such as cash transfers and subsidized housing.
MARKET FAILURES AND EXTERNALITIES
Corrective Interventions
Examination of how governments address market failures, externalities, and public
goods through regulation, subsidies, and taxes.
PUBLIC CHOICE AND POLITICAL ECONOMY

Study of how political factors influence government decisions on revenue generation,


expenditure allocation, and economic policies.

Public choice is often cited in explaining how government spending decisions often contradict
the preferences of the general public.
INTER-GOVERNMENTAL FISCAL RELATIONS

Analysis of fiscal interactions between different levels of government, such as central, state, and local
governments, and their impact on resource allocation and service provision.
1. address fiscal imbalances and ensure fair distribution of resources across the country;
2. drive policy priorities.

Central government’s exclusive powers

National and provincial government’s concurrent powers

Municipal powers
OPTIMAL TAXATION AND PUBLIC FINANCE
THEORIES

Exploration of theoretical frameworks and models that help


economists understand how governments can design efficient
and equitable taxation and expenditure policies

The theory of public finance


suggests the idea of a purposive
conduct of economic affairs.

Optimal tax theory or the theory of optimal taxation is the


study of designing and implementing a tax that maximizes a
social welfare function subject to economic constraints .
ENVIRONMENTAL AND SUSTAINABLE FINANCE

Consideration of how fiscal policies can


promote environmental sustainability and
address issues like climate change through
taxes, incentives, and funding.

A common way to opt for sustainable finance is by investing in segments such as


energy generation, which include solar photovoltaics, on and offshore wind,
hydropower and broader energy services.
ACTIVITY 1

Question #1

Discuss the role of public finance in achieving social and economic objectives. How does the
government's management of taxation, public spending, and resource allocation contribute to
economic efficiency and the well-being of its citizens? Provide examples of how different levels of
government (national and local) address these challenges and the potential trade-offs involved in
policy decisions.

Question #2

Discuss the relationship between budget formulation and fiscal policy. How does the process of
setting government budget priorities influence macroeconomic outcomes such as economic growth,
inflation, and unemployment? In your answer, consider how decisions made during budget formulation
can either support or undermine the broader objectives of fiscal policy.
ROLE OF GOVERNMENT IN THE
ECONOMY
KEY ASPECTS OF THE GOVERNMENT'S ROLE IN THE
ECONOMY:
Providing Public Goods and Services:
Government ensures the provision of essential public goods and services
that might not be efficiently supplied by the private sector. These include
infrastructure (roads, bridges), national defense, law enforcement, public
education, and healthcare.

Regulation and Oversight:


Governments regulate industries to prevent market failures, monopolies,
and unfair competition. They set standards for safety, environmental
protection, and consumer rights to ensure the well-being of citizens.
Market Failure Correction:
When markets fail to allocate resources efficiently,
governments step in to correct these failures. This can
include addressing externalities (like pollution), providing
information, and intervening in cases of asymmetric
information.

Redistribution of Income and Wealth:


Governments use taxation and social welfare programs
to address income inequality and provide a safety net for
the less privileged. This can involve progressive taxation
and social assistance programs to support vulnerable
populations.
Macroeconomic Stabilization:
Governments implement fiscal and monetary policies to
stabilize the economy. Fiscal policies involve adjusting
government spending and taxation to influence demand, while
monetary policies involve regulating the money supply and
interest rates to control inflation and unemployment.

Promotion of Economic Growth:


Governments often invest in infrastructure, education, research,
and innovation to foster long-term economic growth. They may
provide incentives for businesses, support entrepreneurship, and
encourage foreign investment.
Managing Externalities:
Governments address positive and negative externalities
(unintended effects of economic activities) through regulations,
subsidies, and taxes. For example, carbon taxes can be
implemented to reduce pollution.

Ensuring Financial Stability:


Governments regulate financial institutions and markets to
prevent financial crises. They establish rules and safeguards to
ensure the stability of the banking system and protect
consumers.
International Trade and Relations:
Governments negotiate trade agreements, set tariffs, and
manage international economic relations. They play a role in
promoting exports, protecting domestic industries, and
participating in global economic organizations.

Employment and Labor Market Policies:


Governments implement policies to promote employment and
decent working conditions. This can involve labor regulations,
minimum wage laws, and training programs.

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