CHAPTER 8 Flashcards
Definition of Public Finance by Hugh Dalton:
Public Finance is one of those subjects which are on the borderline between Economics and Politics. It is concerned with the income and expenditure of Public Authorities and with the adjustment of one with the other.
Meaning of Public Finance:
Public finance combines the terms ‘public’ referring to individuals within an administrative territory, often signifying the government in economics and ‘Finance’ meaning income and expenditure. Thus, public finance studies the principles of government income and expenditure at central, state, and local levels, under the public finance branch in economics.
Public Expenditure:
Public expenditure is that expenditure which is incurred by the public authority (Central, State and Local Bodies) for protection of their citizens, for satisfying their collective needs and for promoting their economic and social welfare.
Classification / Types of Public Expenditure:
- Revenue Expenditure
- Capital Expenditure
- Developmental Expenditure
- Non - Developmental Expenditure
Revenue Expenditure:
It is the expenditure of government to carry out day-to-day functions. It is recurring in nature and does not create any assets to the government. It consists of administrative expenditure, salaries, pensions and allowances of Govt. Employees, interest payment, medical and public health services etc
Capital Expenditure:
Capital expenditure of the government is expenditure for progress and development of the country. For example, huge investments in different development projects, loans granted to
the state governments and government
companies, repayment of government loans etc.
Development Expenditure:
The expenditure which results in generation of employment, increase in production, price stability etc is known as developmental expenditure. It is productive in nature. It consists of expenditure on health, education, industrial development, social welfare, research and development etc.
Non - Developmental Expenditure:
It is that expenditure that does not yield any direct productive impact on the economy. It is unproductive in nature and is incurred mainly in form of administrative costs, war expenditures, abandoned government projects etc.
Reasons for Growth in Public Expenditure:
- Spread of Democracy
- Increase in the activities of the government
- Rapid Increase in Population
- Increasing Defence Expenditure
- Growing Urbanization
- Inflation
- Disaster Management
- Industrial Development
Meaning of Public Revenue:
Public Revenue means the aggregate collection of income with the Government through various sources. Its necessity arises due to public expenditure.
Definition of Tax:
“A tax is a compulsory contribution from the person to the government without reference to special benefits conferred.” - Prof. Seligman
Sources of Public Revenue:
1. Tax Revenue:
-Direct Tax:
* Proportionate
* Progressive
* Regressive
-Indirect Tax:
* GST
2.Non Tax Revenue:
* Special Assesment
* Gifts, Grants, Donations
* Special Levies
* Prices of Public Goods and Services
* Borrowings
* Fees
* Fines and Penalties
Meaning Direct Tax:
It is paid by the tax payer on his income and property. He cannot transfer the burden of direct tax to others. The impact and incidence of direct rax falls on the same person. Eg. Income Tax, Wealth Tax.
3 types of Direct Taxes:
- Proportionate: Tax is levied at the constant rate on all incomes.
- Progressive tax: Tax rate increases as income increases.
- Regressive: Tax rate declines as income increases.
Meaning of Indirect Taxes:
It is the Tax levied on goods or services and paid during production, sale or purchase. The burden can be shifted by Taxpayers (Producers) to others, so the impace and the incidence fall on different entities; E.g Goods and Services Tax (GST)
Sources of Non Tax Revenue:
- Special Assesment
- Gifts, Grants, and Donations
- Special Levies
- Prices of Public Goods and Services
- Borrowings
- Fees
- Fines and Penalties
Meaning of Public Debt:
Public Debt refers to the borrowings of the government.
Public debt policy of the government plays an important role in public finance.
Raising Debt is the most common activity of the government because in a welfare state, government expenditure generally exceeds government revenue.
Meaning of Internal Debt:
It refers to the borrowings of the government to raise fund within the economy. In case of Internal Debt, domestic currenncy is used and it is less complex to manage.
E.g. Borrowings from RBI, nationalized banks and business organisations within a country.
Meaning of External Debt:
It refers to borrowings of the government to raise funds outside the economy. In case of external debt, foreign currency is used. It is more complex to manage. E.g. Borrowings from foreign government and international institutions like IMF, World Bank etc.
Meaning of Fiscal Policy:
Fiscal policy is the means by which a
government adjusts its spending levels and
tax rates to monitor and influence a nation’s
economy. It deals with the public expenditure,
public revenue and public debt. In short, it
is the financial policy implemented by the
Government.
Meaning of Financial Administration:
A smooth and efficient implementation of revenue, expenditure and debt policy of the government, is referred to as financial administration.
This includes preparation and implementation of Government budgets along with overall growth of the country.
Government Budget:
Budget is the annual financial statement showing the expected receipts and proposed expenditures of the government in the coming financial year, i.e. from 1st April to 31st March.
Origin of Budget:
The word ‘Budget’ is derived from the
French word ‘Bougette’, which means a bag
or a wallet containing the financial proposals.
Central Budget provisions are divided into-
1) Revenue Budget and
2) Capital Budget
Revenue budget:
The revenue budget includes the government’s revenue receipts and expenditure. Revenue receipts are divided into tax and non tax revenue, while revenue expenditure covers interest on government borrowings, subsidies and grants to state governments.
Capital Budget:
It consists of capital receipts and payments. Capital receipts are government loans raised from the public and the reserve Bank of India, divestment of equity holding in the public sector enterprises, loans received from the foreign governments, and other foreign bodies, state deposit funds, special deposits, etc
Capital payments refer to the capital expenditures on various development projects, investments by the government, loans given to the state governments and government companies Corporations and other parties. Besides, it includes expenditure on social and community development, defence and general services
Types of Budgets:
- Balanced
- Surplus
- Deficit
Meaning of Balanced Budget:
It is a situation in which estimated revenue of the government during the year is equal to it’s anticipated expenditure i.e. Goverment Receipts = Government Expenditure.
Meaning of Surplus Budget:
Government Budget is said to be surplus, when estimated government receipts are more than the estimated government expenditure. i.e. anticipated government receipts > estimated
government expenditure.
Meaning of Deficit Budget:
Government budget is said to be deficit, when anticipated Government receipts are less than the estimated government expenditure. i.e. Anticipated Government Receipts < Estimated Government Expenditure.
Importance of Budget:
- Tax Rates presented in the budget indicates disposable income of the tax payer. It also determines the development of business and individuals.
- Government expenditure is also a part of the budget. This public expenditure on defence, administration, infrastructure, education, healthcare, etc. affects the lives of the citizens and overall economy.
- Govt uses budget as a medium for implementing economic policies in the country.
- Budgetary actions of the government affect production size and distribution of income, utilisation of human and material resources of the country.
