Advanced Public Finance and Taxation

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 CHAPTER ONE
Public Finance- An
Overview
 What is public
Generally we canfinance ? finance as:-
define public
Public finance is about the taxing and spending activities of
the government.
Public finance means how the governmentraises funds
and spends the money on various kinds of services for the
economy.
So public finance is concerned with the revenue and
expenditure of the government
Also known as “public sector economics” or “public
economics.”
Specificall
yAccording to Dalton,‟ Public finance is the branch of
knowledge which is concerned with the income and
expenditure of public authorities and with the
adjustment of one to another.‟ It deals with the study of
revenue and expenditure of the government at the
centre, state and local bodies.
In the words of Prof. Lutz, “ Public Finance deals with
the provision custody and disbursement of
resources needed for conduct of public or government
function”
Meaning
…..
 According to Carl Plehn, “ Public Finance is a science
which deals with the activities of the state in
obtaining and applying the material means
necessary for fulfilling the proper function of the
state”

In the words of Fudlay Shirras, “ Public Finance is the

study of the principles underlying the spending and
raising of funds by public authorities.”
Meaning…
. In the words of Bastable, “ Public finance deals with

expenditure and income of public authorities of the
state and their mutual relations as also with the
financial administration and control”
All of them say that it is a study of income and
expenditure of the central, state , and local
governments.
Therefore, raising of funds for the expenditure and
their disbursement constitutes the subject of public
finance.
 Function of Public finance
1. Allocation of resource function
The major function of public finance is allocation of
nation’s resources for economic and social
development
2. Distribution function
Aim at fair distribution of nation’s income and
wealth among the citizens
3. Stabilization function
Its aim is to bring economic stability in economic growth
4. Growth function
Its aim is to achieve economic growth and development
Scope of public Finance
The contents of the science of public finance are
divided into the categories of financial activities
of the government:
Public Expenditure
Public Revenue
Public Debt
Financial Administration and control, and
Economic stability and growth


Meaning and objectives of public
expenditure
Public expenditure is incurred by public
authorities-
central, state, and local governments- either for
satisfaction of collective needs of the citizens the
or
promoting their economic and social welfare. for
It is incurred by the government for the attachment of
public good.
Every government has to maintain law and order,
armed forces for providing protection, public parks,
schools, health of the people.
Structure of
Technically, in the structure of a budget,
budget

most governments classify public
expenditure into two:-
1. Current expenditure, and
2. Capital expenditure
All sorts of administrative, defense expenditure and debt
services are called current expenditure. They are also
referred to as non- developmental expenditure. They are
intended for continuing the existing flow of goods and
services and maintaining the capital of the country
intact.
Structure
…
On the other hand , „Capital expenditures‟
contribute to increased productive capacity
of the nation, and therefore, are known as
development expenditure.
Expenditures on construction of dams, public
works, state enterprises, agricultural and
industrial development etc., are instances of
capital expenditure.
Objectives of Public Expenditures
The aim of public expenditure has two parts:-

1. Security of life against the external

aggression and internal disorder and
injustice,
2. Development and up gradation of social-life
in the community.
Reasons for growing public
expenditure
 Increase in Defense Expenditure
 Expansion of Government
Functions
 Backward Area
 Increase in Population
 Higher Price Level
 Duplication of Expenses
 Accelerating Economic Growth
Canons of Expenditure
In economics literature, the expression “Canons of
public expenditure” is used for the fundamental rules
or principles governing the spending policy of the
government.
The following canons of public expenditure have been
laid down;-
Canon Benefit:-Every public spending must
ultimately be used for the “cause of social benefit”,
i.e, for the general well being of the common people.
Canon..
 Canon of economy:-Public expenditure should be
incurred carefully and economically.
o Economy here means that wasteful and
extravagant expenditure should be avoided
at all levels.
 Canon of Sanction:-This canon suggested that no public
spending should be made without the approval of proper
authority.
o Only obtaining prior sanction is not sufficient. It
must be properly inspected and examined whether
the sanctioned amount of money is being spent
properly on sanctioned items or not.
Canon
…Canon of
 Surplus:-Saving is a virtue even for the
government, so an ideal budget is one which contains an
element of surplus by keeping public expenditure below
public revenue.
 Canon of Elasticity:-the expenditure policy of the state
should be such that changes must be possible in the
expenses according to the changes in requirements and
circumstances.
 Canon of productivity:-the expenditure policy of the
government should be such that would encourage
production in a country.
o That means a large part of public expenditure
must be allocated for development purposes.
Canon
…Canon of Equity:-

One of the foremost aims of public expenditure is also
to ensure the just and equitable distribution of income
by conferring benefits on the poorer section of the
community.
Difference between public Finance
and Private Finance
1. Adjustment of Income and expenditure.
An individual usually adjusts his expenditure to his
income. But the public authority generally adjusts its
income to its expenditure.
The public authority prepares an estimate of the total
expenditure to be incurred during a fiscal year and
then devises ways and means to raise the required
amount.
The individual, on the other hand, tries to live within
his own means. His expenditure is generally
determined by his income.
Diff
…
2. Unit of time.
 The public authority balances its budget during a
given period which is generally a year.
 For an individual, there is no period of time in the
course of which the budget must be balanced.
Issue of currency:- Government has full control over
the issue of currency in the country. No other person
except the state can print notes.
Diff.
3. . Government is permanent:
 The life of a public body- like the government is very
much longer than that of an individual.
 The government spends its funds on long gestation
projects
which prove fruitful and beneficial for the society in the
long run.
 But an individual is generally concerned with immediate
gains. His/Her lie being shorter, he/she can wait only for a
short period.
 Consequently, it is sometimesargued that the
government
spends for future while individual spends for the present.
Diff
….
4. Surplus budgeting
 For an individual, excess of income over expenditure or
surplus budgeting is considered to be a virtue but for the
public authority it is not as such, it is expected from the
government that it should raise only as much revenue as it
needs during a calendar year.
5. Mystery shrouds Individual Finance.
 Individual's finance is usually shrouded in mystery.
Everybody likes that his financial position should remain a
closely guarded secret but this is not the case with public
authorities.
 The government publishes its budget and gives due
publicity to it.
Public Revenue
 This is one of the branches of public finance. It
deals with the various sources from which the
state might derive its income.
These sources
include:-
 Incomes from taxes
 Commercial revenues in the
form of prices of goods and services
supplied by public enterprises,
Administrative revenuesin the form of fees,
fines etc and
 Gifts and grant.
Public
Debt
Public debt refers to government debt.
Public debt refers to “obligations of governments,
particularly those evidenced by securities, to pay sums
to the holders at some future date”.
It refers to Government borrowings from individuals,
financial institutions, organizations and foreign
countries.
If revenue collected through taxes & other sources is
not adequate to cover government expenditure
government may resort to borrowing.
Dept
…Such borrowings become necessary more in times of

financial crises & emergencies like war, droughts, etc.

Public debt or public borrowing is consideredto be

an important source of income to the government.

 Thus public debt is one of the instruments to cover

deficits in budget.
EFFECTS OF PUBLIC
DEBT
 POSITIVE EFECTS OF PUBLIC DEBT:
o Mobilization of resources
o Increase in the productive
capacity
o To promote Investments
o Developmental expenditure
o Obtaining foreign exchange
Effect
…ADVERSE AFFECTS OF PUBLIC

DEBT:
Inflationary impact
Additional tax burden
Adverse effect on saving and
investment
Unproductive debt
Debt servicing burden
Financial Administration and
Control
 This category includes the preparation of financial
budget, the control and administrations of the budget
relevant problems like through auditing etc.

The term budget includes „Annual Financial

Statements’ which incorporates all the annual
statements of receipts and expenditures of the
government.
Economic Stability and
Growth
 The study of public finance includes fiscal
policy of the government in dealing with:-
Inflationary and deflationary situations
 Instability of the price level,
Promotion of full employment
 Growth of economy and
Welfare of the people, etc.
Stability
…Economic stabilization is of recent origin. It has a wide

scope to play especially in the less developed
countries. The main task of this section is to frame and
look after the implementation of various policies
required for economic stabilization and growth.
The Gov't can stabilize or sustain the growth of its
Economy through Fiscal policy and monetary policy
En
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