Lecture 1 Public Finance PDF

Dr. Mona Mahmoud Lecture 1 What is the Meaning of Public Finance? - It is made of two words as public and finance. The term public means government and finance means science of management of money. So literally public finance means the study of allocation of economic resources for achieving th...

Dr. Mona Mahmoud Lecture 1 What is the Meaning of Public Finance? - It is made of two words as public and finance. The term public means government and finance means science of management of money. So literally public finance means the study of allocation of economic resources for achieving the goals. - Public finance is studying the activity of the state when it uses the financial means and methods, i.e. public revenue and public spending, to achieve the objectives of society. Components of Public Finance Components of Public Finance Tax collection is the main revenue source for governments. Examples of taxes collected by governments include sales tax, income tax (a type of progressive tax), estate tax, and property tax. Other types of revenue in this category include duties and tariffs on imports and revenue from any type of public services that are not free. 2- Expenditures Expenditures are everything that a government actually spends money on, such as social programs, education, and infrastructure. Much of the government’s spending is a form of income or wealth redistribution, which is aimed at benefiting society as a whole. The actual expenditures may be greater than or less than the budget. 3- Deficit/Surplus If the government spends more than it collects in revenue there is a deficit in that year. If the government has less expenditures than it collects in taxes, there is a surplus. 4. Budget The budget is a plan of what the government intends to have as expenditures and revenues in a fiscal year. Budget passes through many stages to be in execution phase. 5. National Debt If the government has a deficit (spending is greater than revenue), it will fund the difference by borrowing money and issuing national debt. Managing Public Finance Let’s take a closer look at how taxes, expenditures, and the deficit work. Below is a diagram of how the three are connected, and how the government determines how much financing it needs in a given fiscal year. Total government revenue or tax collection is represented by the blue bar. This is a source of cash for the government. Expenditures are a use of cash, and to the extent that they are greater than revenue, there is a deficit. The difference between revenue and expenditures is the deficit (or surplus) that is funded with national debt. Managing Public Finance Facts Related with Revenues and Expenditures 1) Non-optional – economic entities are forced by law to contribute to the joint budget of national or local authorities. - As a result, people with no exemption, have to pay, with no option to avoid paying taxes or duties. 2) Non-refundable – no amount will return back to the entities, if they didn’t use the public goods or services. 3) Non-equivalent – amount contributed by entities to revenues or funds, is not equivalent to the public benefit from this contribution. Simply, poor households contribute less, but the goods provided for them by the public sector are relatively large. With regards to rich households, the situation is reversed. Why Public Finance is Important 1. Resource allocation: Public finance helps to allocate resources effectively and efficiently. It ensures that the government's resources are used to achieve the maximum benefit for society. For example, public finance can be used to finance the building of new schools and hospitals, which can improve the quality of life for citizens. 2. Income distribution: Public finance plays a crucial role in reducing income inequality. It can be used to provide social welfare benefits to the poor and vulnerable sections of society. For example, public finance can be used to finance unemployment benefits, which can help people who have lost their jobs to meet their basic needs. Why Public Finance is important 3. Economic stabilization: Public finance can be used to stabilize the economy during times of economic recession or inflation. It can be used to influence the level of aggregate demand by adjusting government spending and taxation policies. For example, during a recession, the government can increase its spending to boost demand and stimulate economic growth. 4. Public goods and services: Public finance is essential for financing public goods and services such as education, healthcare, and infrastructure development. These goods and services are necessary for the overall development and well-being of society. For example, public finance can be used to finance the construction of roads and bridges, which can improve transportation and commerce. Goals of Public Finance Through public finance, we can achieve or contribute in the following: 1. Steady state economic growth: Public finance is important to achieve sustainable high economic growth rate. (How? By the following action) The government uses the fiscal tools in order to bring increase in both aggregate demand and aggregate supply. The tools are taxes, public debt, and public expenditure. Goals of Public Finance 2. Price stability: The government uses the public finance in order to overcome inflation and deflation. During inflation it reduces the indirect taxes (sales tax, value-added tax, customs duties) and general expenditures but increases direct taxes and capital expenditure. It collects internal public debt and mobilizes for investment. In case of deflation, the policy is just reversed. Goals of Public Finance 3. Economic stability: The government uses the fiscal tools to stabilize the economy. During prosperity, the government imposes more tax and raises the internal public debt. During recession, the case is just reversed Goals of Public Finance 4. Equitable distribution: The government uses the revenues and expenditures in order to reduce inequality. If there is high disparity, it imposes more taxes on income, profit and properties of rich people and on the goods they consume. The money collected is used for the benefit of poor people through subsidies, allowance, and other types of direct and indirect benefits to them. Goals of Public Finance 5. Proper allocation of resources: The government finance is important for proper utilization of natural, manmade and human resources. Therefore, regarding the production and sales of less desirable goods, the government imposes more taxes and provides subsidies. On the other hand, it imposes lower taxes on more desirable goods. Goals of Public Finance 6. Balanced development: The government uses the revenues and expenditures in order to erase the gap between urban, rural, agricultural, and industrial sectors. For it, the government allocates the budget for infrastructural development in rural areas and direct economic benefits to the rural people. Goals of Public Finance 7. Promotion of export: The government promotes exports through imposing less tax or exempting from the taxes or providing subsidies to the export oriented goods. It may supply the inputs at the subsidized prices. It imposes more taxes on imports and so on. Goals of Public Finance 8. Infrastructural development: The government collects revenues and spends for the construction of infrastructures. It has to keep peace, justice and security too. In addition, it has to bring socio-economic reformation.