Chapter One : Basics of Public Finance

 Governments, all over the world have started

number of public projects. To provide social
facilities, the government requires adequate
revenue.
 Public Finance, therefore, deals with the income
and expenditure of public authorities. So, it deals
with the financial operations or finances of the
government.
 The government raises revenue from internal as
well as external sources to incur huge
expenditure on various functions the government
has to perform.
 Cont…..
 Public finance is thus concerned with the use
and exploitation of essential monetary resources
of the government.
 Public finance deals with how and through what
different sources the government gets income,
how it spends it and how it controls and
administers its incomes and expenditures.
 Therefore, the subject matter of public finance
deals with public revenue, public expenditure,
and public debt.
 Scope of Public Finance
 The subject matter of the public finance is
classifies under five broad categories.
1. Public Revenue
2. Public Expenditure
3. Public Debt
4. Financial Administration and Control, and
5. Economic Stability and Growth.
 Revenue includes all incomes irrespective of the source
they are obtained from.
 Public revenue includes only those incomes which do not
carry with them the obligation of repayment for the state.
 Similarities & Difference b/n Public
Finance & Private Finance
 Finance in general mean public & private finance.

 Public finance relates to the money-raising and

income-expenditure functions of the government.
Private finance refers to the income-expenditure
phenomenon of an individual or private business.
Similarities:
1. Satisfaction of Human Wants:- Public finance is
concerned with the satisfaction of social or
collective wants, whereas private finance is
concerned with the satisfaction of personal or
 Similarities Cont….
2. Borrowings:- Both Private and Government
obtained fund from the market in the form of
borrowings whenever the expenditure of either the
government or any individual or firm exceeds their
income/revenue.
3. Engagement in Similar Activities;- Both the
private and public sectors are engaged in activities
that involve lots of purchases, sales and other
transactions. Similarly, they are engaged in
production, exchange, saving capital accumulation,
investment, and so on.
 Similarities Cont….
4. Scarcity of Resources:- Both have unlimited
objectives, whereas the resources are limited.
Dissimilarities:
1.Motive:- The motive of private finance is personal
interest or benefit, whereas the motive of public
finance is social benefit or public welfare.
2. Adjustment Approach of Income & Expenditure :-
every individual tries to adjust his expenditure to his
income because his expenditure depends on his income.
Conversely, the government first prepares its budget.
In other words, the government first determines its
expenditure and then devises ways and means to raise
the requisite revenue to meet its expenses.
 Dissimilarities Cont….
3. Nature of Resources:- The resources of an
individual are more or less limited, whereas the
resources of the government are enormous.
Government can raise resources from tax sources as
well as non-tax sources.
4. Long/Short-term Consideration:- Private
individuals incur expenditure in those areas of
business which give quick returns. Government
incurs expenditure keeping in view the long-term
considerations, such as construction of dams, multi-
purpose hydro-electric projects, etc.
 Dissimilarities Cont….
5. Elasticity of Finance:- Public finance can be
increased by imposing various taxes as public
finance is open to drastic changes. Private finance
cannot be increased as there is not much scope for
changes in private finance.
6. Right to Print Currency:- The government has a
right to print currency which is legal, whereas
private individual does not enjoy such a right.
 PUBLIC REVENUE
 Public revenue is very necessary for the govt. to perform
its various functions for the welfare/benefit of the
society.
 It has effects on the nature and the volume of economic
activities and on employment.
 Important and common sources of public revenue are:
- Taxes
- Income from currency
- Sale of public assets
- Commercial revenues
- Administrative revenues e.g., Fees, fines, licenses.
- Grants and gifts
 P. REVENUE Cont…
 Basic Categories of Government Receipt:
A. Revenue Receipts
B. Capital Receipts
A. Revenue Receipts: Which includes:
1. Tax-revenue Receipts.
2. Non-tax revenue Receipts.
1. Tax Revenue Receipts: It is divided into three sections:
i. Taxes on income: It covers corporation tax, income tax
and similar other taxes.
ii. Taxes on property & capital transactions: Taxes on
specific forms of wealth and its transfers such as estate
duty, wealth tax, gift tax, house tax, land revenue and
stamps and registration fees, etc.
 P. REVENUE Cont…
iii. Taxes on commodities and services: This section
includes taxes on production, sale, purchase, transport,
storage, and consumption of goods and services.
2. Non-tax Revenue Receipt: Which Includes
i. Interest receipts, dividends and profits: Which Includes
 Interest receipts on loans by the government to other
parties,
 Dividends and profits from public sector undertaking.
E.g. contributions from railways, posts and
telecommunications.
ii. Other non–tax revenue: It covers revenue from
administrative services, water and power development
services, education, housing e.t.c.
 P. REVENUE Cont…
B. Capital Receipts:
The most important one comprises of borrowings which
can be classified in terms of their origin and maturity.
based on origin, public borrowings may be external
(outside country), or internal (with in country).
In terms of maturity, there may be “long term”, “medium
term”, or “short term” loans.
Sources of public revenue in Ethiopia
i. Tax revenue
P. REVENUE Cont…
 P. REVENUE Cont…
ii. Non-tax revenue
Administrative revenues
Government investment income
Dividend
Privatization proceeds
Capital income from sale of goods and services
PUBLIC EXPENDITURE
Every government has to maintain law & order, armed
forces for providing protection, schools, health of the
people, arranging for cheap food & cloth and low-cost
housing for the poor and so on. All these mixed activities
which are increasing every year require huge funds.
 P. EXPENDITURE Cont…
 Technically, in the structure of a budget, most
governments classify public expenditure into two:
(i) Current expenditure, and
(ii) Capital expenditure
 Current expenditures are all sorts of administrative and
defense expenditure. They are also referred to as non-
developmental expenditure.
 Capital expenditures contribute to increased productive
capacity of the nation. They are also known as
development expenditure.
 Example of Capital Expenditure: Expenditures on
construction of dams, public works, state enterprises,
agricultural and industrial development.
 P. EXPENDITURE Cont…
Reasons for Growing Expenditure:
1.Population growth.
2.Increasing urbanization.
3.Maintenance of law and order.
4.Welfare activities.
5.The government now has to assume such responsibilities
as family & child welfare, social security like old age
pension, unemployment benefit, sickness benefit, etc.
housing for the poor, welfare of backward classes, subsidy
on food & production inputs, etc.
5. Provision of public goods and utility services.
1.Public goods are those that are consumed equally by all.
 P. EXPENDITURE Cont…
Reasons for Growing Expenditure…
6. Servicing of public debt.
The repayment of debt & obligation to pay service charges
become huge.
7. International obligation.
Modern states have to maintain many international socio-
political and economic links e.g. I.M.F & UN.
8. Defense.
9. Transport and Communication:
With the expansion of trade & commerce, the government
has to provide & maintain a quick & efficient transport
system.
 P. EXPENDITURE Cont…
Reasons for Growing Expenditure…
10. Rising Trend of Prices:
Public expenditure is also increasing in every country due
to rising trend of prices.
11. The Rural Development Effect:
In an underdeveloped country, the government has also to
spend more & more for rural development.
Canons/Principles of Public Expenditure
It used for the fundamental rules or principles governing
the spending policy of the government.
The public expenditure canons/principles are:
1. Canon of Benefit
 P. EXPENDITURE Cont…
Canons/Principles of Public Expenditure…
2. Canon of Economy 5. Canon of Productivity
3. Canon of sanction 6. Canon of Equity
4. Canon of Surplus 7. Canon of certainty.
–Canon of Benefit:
Public expenditure should be so planned & implemented
as to bring about the greatest possible benefit to society.
All such expenditures which do not bring benefit to
society should be avoided.
 P. EXPENDITURE Cont…
2. Canon of economy:
Public expenditure should be incurred carefully so that
there is no wastage of funds.
Since resources are limited in the society, they have to be
most properly utilized.
3. Canon of sanction:
This cannon suggests that no public spending should be
made without the approval of proper authority.
4. Canon of surplus.
This canon requires that expenditure of public authorities
should be kept within the limits of current revenues.
If possible, the expenditure should be less than the
earnings of government
 P. EXPENDITURE Cont…
5. Canon of Productivity:
Expenditure policy of the Governments should be such
that would encourage production in a country. Which means
large part of public expenditure must be allocated for
development purpose.
6. Canon of Equity:
One of the foremost aims of public expenditure is to
ensure equitable distribution of income where the gap
between the highest income and the lowest income groups is
very wide.
 P. EXPENDITURE Cont…
7. Canon of certainty:
This canon requires that public authorities should clearly
know the purpose and objective of public expenditure.
The canon of certainty is followed through the preparation
of budget.
Thank You!