Public finance is an aspect of economics which shows a detailed analysis of the financial activities of government with respect to revenue and expenditure.
Objectives of Public finance
Efficient allocation of resources : This is to ensure that resources are effectively and efficiently allocated among competing units.
To improve the level of production : It is used to stimulate the level of productivity by reducing tax, granting subsidies and increasing the size of governments investment in productive activities.
Re-distribution of income: It helps to redistribute income and productive goods among the various classes in economy.
To maintain price stability : It works towards ensuring stability of price of goods and service. It prevents inflation and deflation.
To promote welfare : The welfare of the public can be promoted through provision of social goods at reduced cost.
Methods of Government Intervention
A Fiscal policy: This is a deliberate action on the part of the government to use tax and expenditure to regulate economic activities. It is the adjustment of government revenue and expenditure in order to affect aggregate demand and to regulate the economy as a whole.
Types of Fiscal Policy
Discretionary policy : This is a deliberate action by the government to adopt and manipulate fiscal policies to achieve macro economic goals and regulate economic activities.
Automatic Fiscal policy: This is referred to as built in stabilizers . They are inbuilt fiscal measure which help to regulate economics activities.
Objectives of fiscal policies
It is used to solve the problem of unemployment
It can be used to solve inflation through reduction in public spending and increase in tax
It can be used to redistribute income sand wealth among various groups of the society.
It helps in the allocation of resources
Balance of payment equilibrium is achieved by imposing tariff of some selected goods.
Some of the instruments of fiscal policy are taxation,expenditure,borrowing and national budget.
B Monetary policy: This is the macroeconomic policy laidvdown by the central bank. It involves management of supply and interest rate and is the demand economic policy used by the government to achieve macroeconomic objectives like inflation,consumption, growth and liquidity. It’s objectives are price stability,high employment and faster rate of economic growth.
Types of Monetary Policy
Expansionary monetary policy: This is the policy of increasing money supply in the economy with the hope of boosting investment and consumer spending. The lower rates on interest is charged to encourage loans so as to expand productive activities and more is spent on consumer goods.
Contractionary monetary policy: This is the policy used by the government through the central bank to slow down economic growth and purposely to control inflation. This is done by increasing interest rates and slowing the growth of the money supply,aims at bring down inflation.
Tools of Monetary Policy
1 Open market operation
2 Direct lending to banks
3 Bank revenue requirement
4 Unconventional emergency programs
5 Managing market expectation
C Direct Control policy: It is used to establish limits on interest rates,credit and lending. These include direct credit control,direct interedt rate control and direct lending to banks as lender of last resort but they are rarely used in the implementation of monetary policy of the bank.
Direct Policy Tools
1 Interest rate control : Here,the central bank could announce maximum and minimum rates of interest and other charges that domestic banks may impose for specific types of loans,advances or other credits and pay on deposits
2 Credit control: Here,the volume ,terms and conditions of domestic bank credit is controlled. This also include installmeht credit extended through loans ,advances or investment.
3 Lending to domestic banks: The bank may provide credit backed by collateral to domestic banks to meet their short term liquidity needs as lender of last resort.
These are income accruing to the government of a country from various sources. It is the income generated by the government from its operations.
It can classified into:
Revenue receipts : This is the total amount of money collected by the government of a country from their regular sources of revenue like feels, licences, taxes, etc.
Capital receipt: These are the total revenue receives from sales of assets or loan tied to a project e.g sales of assets, loans from institutions tied to a project and grants.
Sources of government revenue
1. Taxation: it is a major source of government revenue. It can be divided to direct and indirect tax.
2. Fees, fines, charges and licences
3. Grants and aids
5. Royalties and rent : Royalties are paid by Mining sector and rent from government properties.
6. Interest dividend and profit from government investments
7. Rates, levies , penalties, donations and disposal of assets.
These are the total expenses incurred by the government of a country at any level.
It can be classified into:
Capital expenditure : These are expenditures incurred on long-term project. Examples are building of classroom, purchase of refuse disposal van, etc.
Recurrent expnditure: These are expenditure used form the day to day running of activities of government. Examples are salaries,repair ,stationery,etc.
However, government expenditure can be divided into:
1 Administrative services : These are incurred on general administration of the country. These includes expenditure on civil service,ministries, judiciary, legislative, executive, foreign affairs departments, etc.
2 Economic services: These are expenditure on industry,commerce, trade, agriculture, constructions, communication,forest and mining. They are incurred to promote economic growth.
3 Social services : These are expenditure in social amenities and infrastructure likes water, electricity,housing, school facilities in order to improve the standard of living.
4 Defence: These are expenditures on the maintenance and training of armed forces like Army,Navy and Airforce and in the purchase of arms and ammunition.
5 Transfer services: These are expenditures on servicing debts,grants and aids,loans to other countries, payment of pensions and gratuities including social amenities.
Reasons for increase in Government Expenditure
1 If there is increase in population,government expenditure increases.
2 Inflation also leads to increase in expenditure
3 The need to acquire arms and ammunition causes increment in expenditure
4 The move ment of people from rural areas to urban areas increases Governm ent expenditures
5 Poverty alleviation programmes increases government expenditure
6 Increase in aids and grants to friendly countries increase government expenditures
7 Increase in cost of administration could lead to increase in Government expenditure
Effect of Public Expenditure
1 It leads to increase in productive activities
2 It encourages income distribution and thereby reduce wealth and income inequality
3 It increases effective demand
4 It enhances econokic growth
5 It is used to reduce inflating
6 It leads to job creation
7 It increases standard of living