 What is Public finance?

According to dalton, Public finance is “concerned with the income and expenditure of public authorities
and with the adjustment of one to the other.”

Prof. Otto Eckstein writes, “Public Finance is the study of the effects of budgets on

the economy, particularly the effect on the achievement of the major economic objects—growth,

stability, equity and efficiency”

Thus, public finance deals with the question how the Government raises its resources to meet its ever-
rising expenditure.

 Difference between public finance and private finance

Public finance Private finance
Public finance is concerned with the Private finance is the study of income and
revenue/incomes and expenditure, borrowings, etc. expenditure, borrowings, etc. of individuals,
of the economy or government. households and business firms.
Public finance objective is to promote social Private finance objective is to maximize profit.
welfare.
Government usually makes a deficit budget, i.e, Private entities makes usually make a surplus
where expenditure exceeds revenue. budget ,i.e, where revenue exceeds the expenditure
The govt. has more sources for creating money Private entities have limited sources to generate
,such as printing money and establishing laws to revenue.
raise its revenue.
Public finance is more elastic to change Private finance is less elastic to change.
  Subject matter /Factors /main baranches of public finance:
1)public revenue

2)public expenditure

Of the two main branches of public finance, namely public revenue and public expenditure, we

shall first study the public expenditure.

 Public expenditure:
 Public expenditure refers to the expenditure incurred by the public authorities either for
protecting the citizens or for satisfying the collective needs of the citizens or for promoting their
economic and social welfare.

 Classification of Public Expenditure

Public expenditure has been classified into various categories. Firstly, Government expenditure has been
classified into revenue expenditure and capital expenditure.

Revenue Expenditure : Revenue expenditure is a current or consumption expenditure incurred on

civil administration (i.e., police, jails and judiciary), defence forces, public health and education.

This revenue expenditure is of recurrent type which is incurred year after year.

Capital Expenditure: On the other hand, capital expenditure is incurred on building durable assets. It is
a non-recurring type of expenditure. Expenditure incurred on building multipurpose river projects, power
plants, ports, highways, steel plants etc., and buying machinery and equipment is regarded as capital
expenditure.

Another useful classification of public expenditure divides it into transfer payments and non-transfer
payments.

Transfer Payments :Transfer payments refer to those kinds of expenditure against which there is no
corresponding transfer of real resources (i.e., goods and services) to the Government. Expenditure
incurred on old-age pensions, unemployment allowance, sickness benefits, interest on public debt during
a year etc.

non-transfer payment: On the other hand, expenditure incurred on buying or using goods and services is
a non-transfer payment as against such an expenditure, the Government receives goods or services. It is
therefore called expenditure on goods and services. services. It may be noted that expenditure on defence,
education, health etc., are non-transfer expenditure as in return for these, Government obtains the services
of army personnel, teachers, doctors etc., as well as some goods or equipments used in these activities.

Another useful classification of public expenditure rests on whether a particular expenditure by the
Government promotes developmentsuch as develoment expenditure & non development expenditure.

Developmental expenditure: All those expenditures of Government which promote economic growth
are called developmental expenditure. expenditure. Expenditure on irrigation projects, flood control
measures, transport and communication, capital formation in agricultural and industrial sectors are
described as developmental.

Non developmental expenditure: On the other hand, expenditure on defence, civil administration (i.e.,
police, jails and judiciary), interest on public debt etc., are put into the category of non-developmental
expenditure.

It is worth noting that division of Government expenditure into developmental or non developmental is
the modern counterpart of the distinction drawn by classical economists between productive and
unproductive public expenditure.

Productive expenditure: expenditure on infrastructure developmeny ,public enterprise or development

of agriculture increase productive capacity in the economy and bring income to the government.

Unproductive expenditure: expenditure in the nature of consumption such as defense,interest payment

expenditure on law and order.

Grants: grants are those payments made by a public authority for which there may not be any return,there
will be no receipt of goods or services.

 Difference between Capital Expenditure and Revenue Expenditure

Capital expenditure Revenue Expenditure

Capital expenditure generates future economic Revenue expenditure generate benefit for current
benefits year only.

Capital expenditure is a one time investment of Revenue expenditure occurs frequently.

money

Capital expenditure is a long term expenditure Revenue expenditure is short term expenditure.
Example: Equipment,Furniture,Building Example: wages paid to labour
Public revenue is exactly income generated from sources of government in order to meet
requirements of expense of public. Public revenue generally refers to the govt. revenue.

 Sources of Tax Revenue:

public
revenue

tax non-tax
revenue revenue

Indirect Fines &

Direct tax fees Forfeiture Escheats
tax Penalties

Tax Revenue
Tax Revenue is the income that is gained by Government through Taxation. Taxes are compulsory
contribution levied by the state for meeting expenses in common interests of all citizens.
Tax revenue can be classified into:
  Direct Tax
 Indirect Tax

 Direct tax: A tax is said to be direct when tax payer bears the burden of the taxes. He
cannot shift the burden to any other person. Example: Income tax, Wealth tax and Gift
tax.

 Indirect tax: Indirect tax is shifted by the payers to others, if sales tax is imposed on
sugar the producer or dealer who pays it passes it on to the next buyer and ultimately the
burden is borne by the consumer.

Non- tax Revenue Source

Non tax revenue sources of public revenue which is raised by the government from other than tax in the
economy.
a) Fees:
A Fee is a significant source of managerial non tax revenue. Fees are a payment charged by the
government to bear the cost of administrative services rendered in public services.

Fess is not a voluntary payment it is a compulsory payment. Fees may be charged for getting license,
passport, registrations, filling of court cases etc.

b) Fines and Penalties

These are general sources of administrative non tax revenue .this may be applied on public for non-
Compliance with certain rules and regulations. This are not considered as the major sources of revenue
for the government.

c) Grants & Gifts

Grants are financial support. this are provided to public authority to perform certain social activities .these
are generated by higher public authority to lower ones e.g. World Bank gives Grants to central bank.

Gifts and donation are voluntarily made by the individuals, organizations or foreign governments to the
central governments. These gifts are made by natural feeling in case of disasters or natural calamities

d) Forfeiture:
It refers to the penalty imposed by courts for the failure of individuals to appear in the court. Forfeiture is
also not important source of revenue.
 e) Escheats:

Escheats are the claims of the government to the property of a person who dies without having
any legal heirs or without keeping a will.in situation all the property of the owner go to the
government.

 Principle of public expenditure:

The main principles or canons of public expenditure are as follows:

1. The principle of maximum social advantage:

All expenditure should satisfy maximum social advantage. The aim is general welfare or
community as a whole not particular group of society.it should assure protection to the people
from internal rebellion and external aggression .government expenditure as such should be
planned as to increase national income and its fiscal policy should be geared as to ensure
equitable distribution of income and wealth.

2. The principle of economy:

Extravagance and waste should be avoided; duplication of expenditure and overlapping also
avoided by authorities. Economy does not mean miserliness .it simply means public expenditure
must be productive and efficient.

3. The principle of sanction:

All public expenditure should be authorized by proper authority and money, sanctioned for one
purpose should not be spent for another purpose. In the absence of proper sanction ,there is every
likelihood of misuse and misappropriation of public funds.

4. The principle of balance budget

This canon insists on a balanced surplus budget as in the case of private finance.Neither continual
surplus nor deficit budgeting is desirable.the former leads to withholding expenditure,even by
restrecting consumption and the latter to additional taxes and additional burden of public debt.