PUBLIC FINANCE

Introduction
 Session Overview
• The solemn and constitutional duty of a
government is to;
 Safeguard and protect the life and liberty of its
citizens,
 Provide a secure and congenial atmosphere to its
citizens,
• Governments are also responsible for providing
roads, ports, airports, health services etc. which an
individual can not acquire on his own.
• The Governments need to incur expenditure for
providing these and other goods/services to its
citizens.
 Contd..
• Governments meet this expenditure partly
by levying taxes on its citizens and partly
by raising loans.
• The financial operations of the
governments with regard to raising and
disbursement of finances are called Public
Finance.
• In this session we will discuss the scope of
Public Finance and various terms used in
connection with Public Finance.
 Learning Points
• At the end of this session the learner will
be able to state the nature and scope of
Public Finance.
 Scope of Public Finance
• Public finance is the study of the income
and expenditure of the State.
• The scope consists in study of the
collection of funds and their allocation
between various branches of State
activities regarded as essential duties or
functions of the State.
Scope of Public Finance-Four
Parts
 Public Expenditure
• The term 'Public Expenditure' refers to the expenses
incurred by the Government for its own maintenance and
also for the preservation and welfare of the society and
economy as a whole.
• It is the end and aim of the collection of State revenues.
• Public Expenditure may be classified as;
• Expenditure which confers common benefit on all,
(public expenditure incurred on general administration
etc.)
• Expenditure which directly confers benefit on certain
persons, and indirectly on the entire society, (Social
security, public welfare, old age pensions etc.)
• Expenditure which confers special benefit on some
individuals (subsidy given to particular
industry/individual).
Canons of Public Expenditure
 Canon of benefit
• Canon of benefit states, that
Public expenditure must result in the
achievement of maximum social
advantage.
Public funds must be spent in those
directions which are most conducive to
public interest.
 Canon of Economy
• According to this canon:
 The public authorities should not waste the
limited resources at their disposal.
 Only the minimal necessary amount should be
spent on any given head of expenditure which
should aim at maximum benefit.
 Canon of Sanction
• The canon envisages that there should be
proper procedure of formulating the policy
for public expenditure with sufficient
safeguards for avoiding arbitrariness and
influence of certain vested interests in the
matter of public expenditure.
 Canon of Surplus
• This canon enjoins that the public
expenditure should be as far as possible
met from current public revenues, without
resorting to deficits or borrowings.
 Canon of Elasticity
• As per this canon of public expenditure:
It should be possible to change the size and
direction of public expenditure according to
the requirements of different circumstances.
 Canon of Productivity
• This canon envisages that the public
expenditure should be such as would
encourage production and productive
efficiency in the country.
Canon of Equitable Distribution
• As the heading suggests this canon is for
equitable distribution of income and wealth
and it is particularly important for those
countries where inequalities exist.
 Focus of Public Expenditure
• Public expenditure is primarily aimed to provide;
• Governance,
• Security and justice to citizens,
• Certain goods and services, namely public goods (like roads,
water supply schemes, electricity, defence forces, etc.)
• Public goods unlike private goods can not be priced and
purchased individually.
• For private goods an individual pays voluntarily, but for the
public goods and services, provision has to be made through
compulsory contributions by the members of the society
through taxation.
• Public goods can be 'Pure public goods' or 'Impure public
goods’ or ‘quasi public goods‘.
• A road open for use of all without any exclusiveness attached to
it , is an example of 'Pure public goods,'
 Contd..
• Another road having a toll barrier is open to only those
who pay the toll is an example of 'Impure/Quasi public
goods.'
• Public expenditure should be predominantly used to
provide 'Pure Public goods/services to the citizens.
• There is yet another category of goods, which is 'Merit
Goods,'
• Merit Goods can be defined as goods which have an
overriding importance for almost all the members of the
society, the examples are educational and health needs
of the society.
• Provisions for 'Merit Goods' help the economy in
attaining a high level of efficiency and in contributing for
achievement of basic objectives of the society.
• Public expenditure as such plays an important role in
'Merit goods.'
Effects of Public Expenditure
• The important healthy effects of the public
expenditure on the economy of any
country are….Effects on,
production and employment,
distribution,
economic stability, and
economic growth
 Public Revenues
• Public Revenues includes all the income and
receipts, irrespective of their source and nature,
obtained by the Government during any given
period of time.
• Source of Public Revenues are:
 Taxes,
 Fees,
 Price
 Fines and penalties,
 Gifts,
 Borrowings, and
 Printing of paper money.
 Public Debt
• Public debt is the loans raised by the government.
• This source of Public Finance carries with it the
obligation of repayment along with interest.
• Important of Public Debt
 The Public debt has gained much importance all over the
world, the main reasons for which are;
 Financing Economic development,
 Unpopularity of Taxation,
 Natural calamities,
 Wars for defending the nation,
 Covering temporary budget Deficit,
 Fighting Depression, and
 Controlling Inflation
 Source of Public Debt
• Some of the important sources of Public
debt are;
Borrowings from individuals,
Borrowings from Commercial Banks,
Borrowings from Non-Banking financial
Institutions,
Borrowings from Central Bank,
Borrowings from External Sources.
 Budget Deficits
• In ideal circumstances the public expenditure should be
equal or less than 'public receipts' (without borrowings).
• Usually the 'public expenditure' exceeds the 'public receipts.'
The 'Gap' between 'public receipts' (without borrowings) and
the 'public expenditure' is called deficit.
• Deficits arise because of imbalances in revenue and
expenditure.
• In the Indian context fiscal imbalances have both been large
and persistent. the size, regularity and composition of
revenue deficit (in particular) has been a cause of concern.
• The annual budget of Government (in India) indicates three
types of deficits, namely
 Revenue deficit,
 Fiscal deficit, and
 Primary deficit.
 Revenue Deficit
• Revenue deficit is the excess of revenue expenditure
of the government over its revenue receipts.
• Revenue deficit leads to increase in borrowings
without corresponding capital/asset formation.
• Revenue deficit is considered generally less
desirable.
• Fiscal Reforms and Budget
Management(FRBM)Act,2003 ,which have been
amended in 2013, provides that the Union
Government shall take appropriate measures to
reduce fiscal deficit and revenue deficit so as to
eliminate revenue deficit by 31 March 2017.
 Fiscal Deficit
• Fiscal deficit is the excess of total expenditure of the
Government over its non- debt receipts (revenue receipts,
miscellaneous capital receipts and recovery of loans and
advances.)
• Fiscal deficit normally represents the net incremental
liabilities of the Government or its additional borrowings.
• The shortfall can be met either by additional public debt
(internal or external) or by the use of surplus from public
account.
• Government may run fiscal deficit and borrow funds for
capital/asset formation or for creation of economic and
social infrastructure.
• It is necessary to analyse various components of the fiscal
deficit.
 Primary Deficit

• Resources are needed to finance the interest

payments, which represent the expenditure of
the past obligations and which are independent
of current allocative priorities.
• The payments on account of interest payments
are separated and deducted from the total
imbalances to arrive at the imbalances of current
nature.
• Primary deficit therefor represents the current
imbalances net of interest payments.