Private and Public Finance for Property - Case Study Example

Part One. Define public finance; its purpose, how it is controlled and its sources of funding Public Finance is the study of public sector activities and operations of the economy. It primarily deals with how the government raises money to pay for the public goods and services it provides to its citizens. Public finance also takes a close look at the main motivation behind the provision of public goods and services. It also investigates the rules that guide public sector decision making and the main differences between public and private goods. On a wider scale, public finance also deals with the policies that the government puts in place to regulate the economy and prevent negative externalities that may negatively affect the citizens. These policies may include measures to prevent pollution as well as economic policies that stimulate the economy. According to Griffith and Wall (2007), Public finance captures many scenarios that are common in every day life and the important role that is played by the government in ensuring fairness and equity in the society. For example everyone wants to enjoy good roads, street lighting, and excellent security but given an option no one would pay for them. After all no one really hates free things. Public finance therefore captures the concept of free riding and what the government does to avoid it. The basic premise is that if someone volunteers to construct a road then all of us can enjoy the service without paying for it. The problem is that hardly will anyone volunteer to construct this road. Public finance covers this and many other challenges and how the government comes in to solve them. Purpose of public finance. Flynn (2007) argues that the main reason behind the existence of public finance is provision of key public goods and services. These public goods and services mostly include defence, policing, roads, health care, education, pension as well as welfare benefits. Provision of these public services would not lead to socially optimal outcome if left in the hands of the private sector whose major motivation is profit. That is why the state comes in to provide these services since it is motivated by the good of the public and not profits. The existence of public goods is further justification of public finance. In most cases, these public goods are least profitable to private enterprises and therefore the government is forced to chip in and provide them free of charge to the general public. Therefore public finance is crucial for a number of reasons. Provision of merit goods There are some goods that are very important and the citizens of a country should enjoy them even if they are not able to pay the market rate for them. A good example is healthcare and education. These services may be provided by the private enterprises but they are quite expensive yet everyone needs them. If they are left to these private individuals then those who cannot pay for them will not enjoy them. That is why the government comes in and builds hospitals and public schools that offer these services free or at a minimal cost. In this way the entire population is able to enjoy these merit goods and this improves their quality of life. Correcting market failures Public finance is critical in correcting market failures that are quite common in the free market. Market failure occurs when the free market institutions are not able to sustain the production and consumption of goods in an efficient manner. Efficiency here refers to producing goods at the lowest possible cost and distribution equity. In this case the produced goods should be enjoyed by as many people as possible regardless of whether they are rich, poor or live in the rural or urban areas. Only the government is capable of enjoying economies of scale since it buys goods in huge quantities and distributes them through out the country in an equitable manner. Market failures occur if the provision of public services is left to the private sector and the government comes in to correct this failure by providing services that are essential to the public yet not profitable. Provision of public goods A public good is one in which use by one entity does not prevent another from using the same good e.g. Roads or street lighting. Public goods cannot be provided by the free market optimally and this is the main reason why the government comes in. There is no motivation for the private enterprises to provide a public good since you cannot limit its use. If you light the road leading to your home, then all the neighbours will enjoy the light yet they did not contribute to its existence. Public goods are non-exclusive in consumption and it is therefore not possible to exclude certain people from enjoying them. It is due to this reason that such goods are not supplied through the normal market price mechanism since people are not obliged to pay for them That is why the government taxes everyone to provide the roads and street lighting since no private individual would volunteer to do so. Through taxation everyone is forced to pay for the public goods and services whether you use them or not. In this case public finance assists the government in provision of public goods which would otherwise not be provided by the private sector. Equity. Through public finance, the government is able to ensure equity in the society mainly through taxation and provision of welfare benefits. The state taxes the wealthy and uses the money to provide basic services to the poor and also pay welfare benefits to those who cannot engage in any meaningful economic activity. This ensures that inequalities in the society are closely checked and this helps in preventing criminal activities and social unrest which are associated with the underprivileged people. Control of public finance and sources of funding. Public finance is controlled by the state mainly through taxation and optimal expenditure of public resources. The government sets the rules of the game in any free market which governs private enterprises. This ensures that the public is not disadvantaged in the provision of any goods whether private or public goods. Negative externalities such as pollution of the environment by the private sector are checked by laws which govern emission of harmful materials in the environment. The state also controls public finance by ensuring that provision of public goods and services is efficient. In particular the state pays attention to how much a given project will cost, what will be its effectiveness and efficiency. All state ventures are closely monitored by the National Audit Office which works to ensure optimal utilisation of resources. Lindelow (2003) states that the main source of funding for public finance is taxation. Tax is a compulsory payment to the state without expectation of any benefit by the tax payer. The government raises money to finance provision of public goods and services through direct or indirect taxation. Direct taxes include income tax also known as Pay As You Earn (PAYE), National insurance contributions and corporation tax which is charged on profits earned by companies. Indirect taxes include the 15% VAT which is charged on goods, stamp duty on land and other property, Fuel duty among others. Borrowing is also another major source of funds for provision of public goods and services. This mostly involves borrowing from the private sector through government bonds or contracting private enterprises to provide public services at a fee through the Private Finance Initiative. Part Two. Select any Government ‘spending’ department; identify its specific spending objectives and principle expenditure programmes then explain how the department’s performance is monitored. Department Chosen: The Department of Health. The department of health is charged with the responsibility of providing the best healthcare and other social services in England. This responsibility is made possible through the National Health Service (NHS). The department sets the standard of health services and generally promotes health care in England. It also takes the lead in controlling environmental hazards and other human activities that pollute the environment. This department is also concerned with articulating policy and legislation that affects the health and social care of people in England. It also sets the frame work for the operation of the National Health Service. The department works with a number of other organisations in the health care industry so as to give the best health care to UK residents. Some of these organisations include the Acupunture Regulatory Working Group (ARWG) which develops proposals and regulation framework for the people in then acupuncture profession. The department of health also works closely with the Advisory committee on clinical excellence awards (ACCEA). This organisation helps in rewarding excellence in the medical profession in an effort of recognising and rewarding the effort of top achievers in the health care industry. The department also works with other organisations such as the Advisory group on reform of the NHS, Advisory committee on dangerous pathogens (ACDP) Advisory group on hepatitis (AGH) among other organisations in the health industry. Specific spending objectives. The specific spending objectives for the department of health includes the provision of better health to the people and helping them stay healthy. The department also makes an effort of empowering people to make good decisions concerning health and also help them in provision of health insurance. Another objective is provision of better care for all. The department strives to offer the best social care to people wherever they are in England in an effective manner. It also helps people make personal choices in the provision of social care. Finally the department strives to offer better value for all. To meet this objective the department seeks to deliver affordable, efficient and sustainable services that contribute to the growth of the economy. Principle expenditure programmes As noted earlier, the department of health is in charge of a number of health programmes which make the bulk of its expenditure. The NHS is one major area that the department of health spends most of its budget in providing quality health care. In the 2008/2009 fiscal year, the department plans to spend 21% of administration expenditure in the overhaul of all the local NHS The budget for this financial year is also aimed at reducing health inequalities around the country. This will be achieved by spending at least 5% of the total budget on this critical area. Other spending programmes include Programme Millions (pounds) Grants to local authorities 1,084.1 Research and development 825.4 Immunisation 307.6 Welfare funds 117.6 Obesity 42.0 Pay and pensions 40.5 NHS choices 40.0 National cancer screening programme 40.0 Ambulance radio contract 34.1 Drugs treatment 405.7 Connecting for health 663.5 Pharmacy contractor payment 666.2 Pandemic influenza 103.0 School fruit and vegetable 41.1 Emergency planning 56.6 Central financed personal services 250.9 Arm’s length bodies 669.9 Clinical negligence liabilities 173.8 Injury benefit review 60.4 Electronic staff records 40.0 Other allocations 1874.5 Total 7536.9 Source: DH Business plan 2008-09 The above figures represent some of the expenditure figures in some key programmes. They present the key health challenges facing the UK today such as obesity in children, research and development and the cancer screening programme. These funds are factored in the health ministry budget and are well monitored to avoid cases of embezzlement and rent seeking that is common in government provided services. How the department of health performance is monitored There are a number of bodies in the UK whose sole purpose is monitoring the performance of the department of health. The two major ones are the National Audit Office, and Parliament. The National Audit Office audits all government departments to ensure that public money is not wasted in questionable deals. The department of health is not an exception and most of its projects are audited and a complete report submitted to parliament. The National Health Service (NHS) and a number of other Arm’s length bodies which support the department of health in provision of health care are also monitored by the National Audit Office. The department of health has actively pursued the Public Finance Initiative through building a number of public hospitals by private investors. This is one area where the audit office has actively been involved in an effort of ensuring that the public gets real value for money. The audit office recently raised several questions on the effectiveness of a number of public hospitals built in Birmingham through the Public Finance Initiative because of their high cost. Parliament is another body that actively monitors the work of the department of health. The health secretary is answerable to parliament and answers queries related to the department of health. However parliament mainly deals with major policies that are pursued by the department of health. These policies are mainly on areas relating to research such as stem cell research and the steps taken in conducting research to combat new and complicated infections such as cancer. Recently the house was concerned with the growing number of obese children in the UK and this forced the department of health to create a budget aimed at containing this ever growing health concern. Finally the department of health sets up internal audit departments to monitor the extent to which its objectives are implemented and whether they are met in an effective manner. For each spending programme there is an internal audit committee that monitors its progress and eventual success. The National Health Service (NHS) and grants to local authorities are particularly monitored to ensure that healthcare and other social services are available around the country. The internal audit and evaluation departments are also required to submit reports on the inefficiencies that hinder the achievement of the set objectives and how they can be avoided in future. Reference: Griffiths, A. & Wall, S (2007) Applied Economics Pearson, London, Flynn, A. (2007) Public Sector Management Sage, London Lindelow, M. (2003) Holding governments to account: Public expenditure analysis for advocacy, London Save the Children DH Business plan 2008-09, viewed 15 April 2009’ http://www.dh.gov.uk/en/Publicationsandstatistics/Publications/PublicationsPolicyAndGuidance/DH_084340 Read More