Public Finance

Back to: ECONOMICS SS2

 

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In today’s class, we will be talking about public finance. Enjoy the class!

Public Finance

CONTENT         

1. Meaning of Public Finance
2. Objectives of Public Finance
3. Fiscal policy and its Objectives
4. Government Revenue
5. Government Expenditure      

DEFINITION

Public finance is defined as an aspect of economics which deals with the financial activities as relating to Income, Expenditure and the National Debts operations, with their overall effects on the economy. That is, it is the management and control of government income and expenditure to achieve government’s policy objectives.  It involves a detailed analysis of the various sources from which the government derives its income (revenue), the items on which the government spends its money and the impact of such government expenditure on different aspects of the economy.

OBJECTIVES OF PUBLIC FINANCE

1. It performs equitable distribution of resources among individual, tiers of government and the various sectors of the economy.
2. It is used to achieve and maintain a favourable balance of payments and economic development.
3. It provides a general parameter for monitoring the economy in terms of growth and stability.
4. It is used to achieve the economic objectives of the government.
5. It is used to ensure good fiscal policy for the regulation of the economy
6. It is used to generate employment avenue to the people
7.  It is to ensure the satisfaction of the needs of the people through the provision of funds for transfer payments e.g. pension fund, unemployment benefits, subsidies etc.

FISCAL POLICY

Fiscal policy may be defined as a government plan of action concerning the raising of revenue through taxation and other means and deciding the pattern of expenditure to be applied.

Fiscal policy, therefore, involves the use of government income and expenditure instrument to regulate the economy to achieve some set economic objectives

The Economic Objectives of the Government on Fiscal Policy includes.

1. Maintenance of stable prices/control of inflation and deflation.
2. Equitable distribution of wealth
3. Efficient allocation of resources
4. Provision of full employment
5. Stability in the exchange rate of the national currency
6. Maintenance of favourable balance of payments

GOVERNMENT REVENUE

Government revenue is total income that is accrued to all levels of administration or government from various sources.

CLASSIFICATION OF PUBLIC REVENUE

Government revenue can be classified as:

1. Recurrent Revenue: This is the total amount of revenue collected by the government of a country from their regular or yearly basic e.g. taxation, fees, licenses, fines etc.
2. Capital Revenue: These are revenue from irregular or extraordinary sources. They are sources of revenue used for meeting expenditure on heavy capital projects e.g. grants or loans collected by the government to build a project e.g. railway line.

SOURCES OF GOVERNMENT REVENUE

The main sources of government revenue are

1. Taxes – are major forms of the source of revenue to governments all over the world. These taxes may be direct or indirect.
2. Royalties – is the money paid by companies engaged in mining activities to the government for rights to explore and exploit mineral resources deposits
3. Earning (income) from government investments e.g. interest, rent, dividends, profits from government-owned business property.
4. Grants and aids from individuals and institutions at home and foreign governments and international organizations.
5. Borrowing:- This could be internal or external borrowing e.g. sale of government securities or loans from African Development Bank, IMF, World Bank, Pars Club etc.
6. Fees, licenses and charges, fines etc.e.g. vehicle license fees, liquor license fees, firearms license fees, international passport fees, court fines, Road Safety Commission fines etc.
7. Other sources e.g. Tolls, rates etc.

EVALUATION

1.  Define public finance.
2. State the objectives of public finance.

GOVERNMENT EXPENDITURE

Government expenditure is the total expenses incurred by public authorities at all levels of administration in the country. This includes money spent by the government on building roads, bridges, schools, hospitals, corporations and other permanent investments.

CLASSIFICATION OF PUBLIC EXPENDITURE

Government expenditure can be classified as:

1. Recurrent Expenditure: These are expenditure incurred in the running of the day to day activities of the government. They are expenses that re-occur within a fiscal year i.e. items/expenses that last for less than a year e.g. wages, salaries, stationery, fuel for official cars, cost of maintaining roads, repairs expenses on dams etc.
2. Capital Expenditure: These are expenditure (investments) on a project that lasts for more than one year. They are used to acquire assets that are of permanent nature e.g. construction of roads, bridges, government buildings, purchase of cars etc. In most cases, recurrent expenditure is spent in maintaining capital projects.

OBJECTIVES OF GOVERNMENT EXPENDITURE

The main items of government expenditure are meant to achieve the following objectives:

1. Defence or National Security: The government provides for the Army, Air force, Navy and the Police to maintain law and order and defend the country from external aggression.
2. General Administration: The government spends money in maintaining the Civil Service and the various officers of the government in the ministries, agencies, corporations, parastatals and departments
3. Providing Social Amenities: Government spends money to provide educational facilities, the supply of pipe-borne water, roads, bridges, ports, telecommunication, power and electricity, etc.
4. Servicing National Debt: Government spend money on the repayment of the principal and interest of both internal and external debts, including payments of pension
5. Direct Productive Service: Government sometimes participate directly by organizing productions of some commodities to promote economic activities and services.

EVALUATION

1. Give five examples of capital expenditure.
2. Highlight three examples of recurrent revenue

REASONS FOR INCREASE IN GOVERNMENT EXPENDITURE

There has been an astronomical increase in the magnitude of government expenditure. Some of the reasons for this include:

1. Population Explosion- increase in population leading to higher administration costs
2. Inflation- the effect of inflation (a general increase in the price level) on the cost of projects undertaken by the government.
3. Devaluation- the effect of devaluation (depreciation) of the Naira on a largely import-dependent economy of Nigeria leads high expenditure.
4. Administrative Cost- the increasing cost of maintaining democratic institutions and a large number of political structures i.e. states, local governments and their officials.
5. Social Amenities- greater demand for social and economic infrastructures and the cost of maintaining existing ones.
6. Economic Development- The economic development programme of the government requires a lot of capital outlay to import the needed equipment/machines
7. A rise in National Debts- the cost of servicing the country’s huge stock of internal and external debt which has kept increasing because of interest capitalization
8. Bribery and Corruption- the high prevalence of corruption and over-invoicing of the cost of projects by government officials and politicians.
9. Defence/Security Expenses- a rise in defence also increase government expenditure.
10. Unemployment- the attempt by the government to combat unemployment also leads to an increase in government expenditure
11. Poverty- efforts by the government to alleviate poverty often leads to high expenditure.

EFFECTS OF PUBLIC EXPENDITURE

1. Some government expenditures help to redistribute the income of the people.
2. Government expenditure in industrial investment helps to generate employment to people
3. Government expenditure helps to allocate certain resources in certain areas to enhance even-distribution of resources.
4. Government expenditure helps to stabilize prices of goods and services
5. Government expenditure in industries helps to create increased productivity and income of an individual with a rise in their purchasing power. 

EVALUATION

1. Explain any two items of government expenditure
2. Distinguish between Capital Expenditure and Recurrent Expenditure.

 

In our next class, we will be talking about Sources of Government Revenue.  We hope you enjoyed the class.

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