PUBLIC FINANCE

Introduction:
Government of every country needs funds to run and manage the country
matters. The main source of funds for government is tax. Various types of taxes
are levied on public; besides these takes taxes government also gets funds from
public through fees, fines and deficit financing. The primary objective of Govt.
funds to do work for welfare of the public Govt. creates employment
opportunities by utilizing these funds. Various types of productive expenditures
like new roads, dams, industrial units' etc. and non productive expenditures like
defense and internal security are made by government. So the branch of
economics which deals with the revenue and expenditures of the government is
known as "Public Finance."
Definition:
According to Prof. A. Smith:
"The study of nature and principles of government's expenditure and
revenue is called public finance“

According to Prof. Dalton:

"Public finance deals with government's revenue and expenditure and
it studies how government maintains equilibrium between its revenue
and expenditure."
Difference between public and private finance:
1) Definition:
The study of government's revenue and expenditure is known as public
finance.
The study of private person's revenue and expenditure is known as
private finance.
2) Expenditure-income adjustment:
Govt. first estimates her expenditures and then gets her income
through taxes according to her expenditures.
An individual first estimates his income and then adjusts his
expenditures according to his income.
3) Record of finance:
The government keeps the record of her revenues and expenditures. This record
guides for the preparation of next budget.
Individuals usually do not keep the record of their finance.
4) Duration of budget:
Government prepares it budget for one year.
In case of private finance, there is no specific duration of budget. It may be daily,
weekly or monthly.
5) Deficit financing:
if govt. expenditures exceed than its income, then it can increase its resources
by deficit financing (issuance of new currency notes)
Deficit financing is a fiscal policy strategy used by governments to bridge the
gap between their expenditures and revenues when expenditures exceed
revenues.
An individual cannot do so, as it is a crime. He is entitled to punishment for this
crime.
6) Secret or open budget:
Govt. announces its budget openly through radio, television and
newspapers. Open budget creates confidence of public on govt. work.
Individuals keep their budget secret Because for declaring their budget
openly, they may face many types of problems like high rate of income
tax afraid of robbers etc.
7) Surplus budget:
In case of public finance, surplus budget makes bad impression on the
minds of people. As people think that the govt. imposes heavy taxes but
spends less on their welfare.
In case of private finance, surplus burden makes good impression. An
individual tries to keep his expenditures low against his income in order
to meet his future needs.
8) Extra ordinary changes:
As Govt. resources and expenditures are vast. So Govt. can make extra
ordinary changes in it budgets.
Individual's income is limited. So he can't make extra ordinary changes in
his budget.
9) Difference in objectives:
The primary objective of utilizing public finance is to work for the welfare
of public.
An individual utilizes his resources in order to get maximum satisfaction
his wants.
10) Foreign aid:
In case of natural calamity e.g. flood, hurricane, or earth quake etc. Govt.
can get finance from foreign countries.
An individual can't get foreign aid directly.
 Sources of Public finance:
1) Taxes:
The major source of public finance is tax. Tax can be defined as: "Tax is a
compulsory contribution by the public to government treasury to meet the
expenditures of the govt. for the common benefit of the public."Taxes can be
classified as:
a) Custom duty: This kind of tax is imposed on imports and exports of the
country. So this tax income depends upon the volume of imports and exports
of the country.
b) Central excise duty: This tax is levied on the goods and services produced in
the country e.g. tax on production of products like sugar, oil, cloth etc.
c) Wealth tax: It is a direct tax. It levied on income and wealth of people of the
country.
d) Sales tax: It is a kind of indirect tax. It is charged on the sales of goods and
services. It receives from the consumers by including in prices.
2) Price:
The government sells some goods and services and charges their price.
For example, it sells petroleum, gas or forest wood etc. price is a major
source of public revenue.
3) Fee:
Sometime government provides some direct services to the people and
charges money in return for these services, it is called fee. For example,
license fee, registration fee of vehicles or court fee etc.
4) Special Assessment:
Sometimes, govt. spends money to provide facilities to a certain area.
For example, it builds roads, parks, schools, hospitals etc. These facilities
increase the value of that area, so govt, charges a certain share of the
increased value of their property by a special assessment.
5) Fines:
The people who disobey state laws, they are punished through fines.
These fines are also a source of public revenue.
6) Local rates:
The local governments levy taxes on the local people to meet their needs.
For example, town committees, municipal committees and district councils
levy some taxes on the local residents. This is also of source of income for
public revenue.
7) Properties of heirless:
If a heirless person dies and he makes no will about his property before his
death, the govt. takes over his property, which becomes a source of its
revenue.
8) Income form investment:
A government invests in commercial businesses and establishes factories for
manufacturing goods. It gets income in the form of profit from them.
9) Income from government property:
A government also gets income from its properties. For example it gets the
rent of mines. Government land, forests, buildings are hired by the people,
which becomes a permanent source of govt. income. Sometimes govt, sells
its property also.
10) Gifts and Aid:
Sometimes a government receives money by way of gifts and aid from
foreign countries. Under developed countries like Pakistan mostly depends
upon such gifts and aid for increasing their resources.
 Heads of public expenditure:
1) Defence:
It is the first and for most duty of a govt. to defend the country from foreign
invaders. For this purpose, it organizes army, navel, and air forces. It has to
purchase war equipments. Every county spends a large amount of its revenue on
defence.
2) Police:
For maintaining law and order in the country, government establishes police
department. This department secures the life and property of the citizens. Govt.
spends a lot of his revenue on this department
3) Civil Administration:
A government has to establish many departments to run the affairs of the
country. It appoints officers and workers to manage these departments. A large
amount of government revenue is spent for the payments of these
departments" employees.
4) Courts:
For settling the disputes of the people of the country, a government has
to establish courts. The government pays salaries to the judges and other
concerning staff.
5) Public Health:
The main objective of a government is to work for the welfare of people.
So it is the duty of government to provide proper health facilities to
people. For this purpose, it builds hospitals and appoints doctors, nurses
and other concerning staff the hospitals. It provides medicines to control
epidemics. This, it has to spend a large amount for this purpose.
6) Public Education:
For country progress and creating awareness among people of country.
education plays a vital role. For achieving this purpose, Government builds
schools colleges and universities. It has to spend a lot on construction of
building, payment of salaries of staff and other necessary tools.
7) Means of Transport:
Transport plays a vital role for the economic development of a country. A
government arranges means of transports; new roads; spreads net of railway,
builds airports and plate-forms, buys ships, plans and buses. So it has to spend a
lot on this purpose.
8) Subsidies:
Sometimes a government gives subsidies on necessaries of life. These subsidies
are also head of public expenditure.
9) Irrigation:
For the development of agriculture, Government builds irrigation projects of
dams, canals, and tube-wells. So these projects. it has to spend a large amount
of public revenue on
10) Social welfare:
Every government spends a large amount of public revenue on social welfare
projects. For example, it sets up orphanages, old houses, public libraries and
parks