The Public Finance Operations - Case Study Example

Public and Private Finance Introduction Public finance has become an important tool with the to implement its policies and programs in order tomaximize social advantage. The public finance operations include both taxes and expenditure. Each such operation affects the economic life of citizens and the community as whole. In this write up the first part defines public finance, its purposes and sources of funding, and the second part contains public spending objectives and evaluation of such spending of the US department of Resource Management – International Affairs. Part First Public Finance ‘The discipline of public finance describes and analyzes government services, subsidies, and welfare payments, and the methods by which the expenditures to these ends are covered through taxation, borrowings, foreign aid, and the creation of new money.’(Carl Sumner Shoup and Steven G Medema, page 3)i In order to understand the nature of public finance it is important to understand the similarities and dissimilarities between public and private finance. Both public and private finance have to balance their income and expenditure. Both try to maximize the benefit with the minimum use of resources. Each of them indulge into borrowings to bridge the gap between current revenue and current expenditure; and both try to increase the income by increasing their investments. But there are marked differences that make public finance distinct from private finance. Public finance prepares an estimate of expenditure and then devises ways and means to raise the funds. One can say that governments adjust income to its expenditure, whereas an individual adjusts expenditures to his/ her income. When government realizes a surplus, it may decide to increase the expenditure in certain desirable directions. That is not case with private funds where expenditures are planned only in accordance with income. Budgeting is an important feature of public finance. For public authorities, the unit of time for budget is one year. At the end of the year budgets are compared with actual figures of revenue and expenditure in order to bring in requisite changes for the ensuing period of budgeting. When the government is hard pressed, they indulge into borrowings at home or abroad, i.e. it can raise either an internal loan or an external loan or both. There is another source open to government. It can resort to printing press. This type of maneuvering is called deficit financing. ‘DR. VKRV Rao defines the term Deficit financing as the financing of a deliberately created gap between public revenue and public expenditure or a budgetary deficit, the method of financing resorted to being borrowing or a type that result in a net addition to national outlay or aggregate expenditure. Deficit financing implies creation of additional money supply.’(Kumar N and Yadav Nirmal, page180)ii The objective of public finance is to maximize social benefit. Governments seek to achieve full employment, an equitable distribution of income and rapid economic growth or economic stability through their fiscal operations. Public finance has the power to change the course of revenue and expenditure as per the thinking of government in power. Under public finance, the government spend large amount of money on schemes like afforestation, public works, social security schemes from which either there may be no monetary return or the return may be delayed for generations. It is very common that government indulge in deficit financing to stimulate the demand in order to revive the depressing economy. On the other hand, during period of inflation, the emphasis is on surplus budgeting so as to reduce the level of effective demand. But surplus budgeting is not necessarily a virtue. It may mean that the level of taxation is kept unnecessarily high and public expenditure is kept unduly low. Certain service, e.g., social service may suffer during surplus budgeting of public finance. To make surplus budgeting a normal feature is not good for public finance. If big surplus recur year after year, it is better either to give relief to the tax- payer or to increase the scale of social expenditure. The importance of public finance arises from increasing functions of the state. It is obvious that for the performance of these functions, finances are required. The strength of a nation is reflected in its budgeting. The extent of state activity and its efficiency are primarily dependent upon the length of its reserves of finances. The importance of public finance lies on not only in increasing functions of the state as stated above but also in the effects of fiscal operations on the life of the nation. Public finance can also be used as a powerful instrument to bring about desired social and economic changes. For instance, the system of public finance in a country affects the entire economic system of the country. That is why public finance is no longer considered as a mere means of raising the state revenues. On the other hand, public finance is now regarded as a powerful instrument of social justice. It is employed by modern governments to bridge, as far as possible, the gap between the rich and the poor. An equitable system of public finance would tax the rich and spend the proceeds in the supply of such services as are calculated to benefit the poor primarily. Tax collection is the major source of revenue in public finance. In modern times, taxation has a dual purpose: (a) to raise funds for the state, and b) to achieve its social and economic objectives through regulation of economy. The effects of taxation are felt not merely when revenue are raised but also when they are spent. Taxation and public expenditure can be so arranged as to encourage production or guide production along the desired lines. The major functions of public finance are as under: a) Allocative function: It refer to the process by which the total resources are divided between the private and social goods and by which the mix of social goods is chosen. This is done by budgeting policy. b) Distributive function: The budgetary policy affects the distribution of income in the community. The tax and expenditure measures are adopted to modify the exiting distribution with a view to reduce the economic inequalities. In this way, an optimal income distribution is brought about. c) Stabilization function: Public finance through its budgetary policy can also be used to maintain a high level of employment, a reasonable degree of price level stability, an appropriate rate of economic growth and stability in balance of payments. The above functions are sufficient to bring into focus the vital role that public finance plays in modern economic life. In fact there is no aspect of economic activity which can escape being affected by the budgetary policy of public finance. Part Two Evaluation of a spending of a government department Two important aspects of public finance are public revenue and public expenditure. Public expenditure has become an important tool in the hands of govt. departments to implement any of their policy decisions. Over the years public expenditure has increased enormously. The main reason is that the function of the state has increased manifold. In the past state was regarded only as a police state concerned with defence from foreign aggression and maintenance of law and order with in the state. Now the state is regarded as a welfare state which is concerned with promoting the welfare of its citizens. As such it has to provide not only social security but it has also to look to economic stability and economic growth which calls for increasing investment expenditure. In order to evaluate the expenditure of a government department, the Brent Council, UK has been selected. The spending objectives of Brent Council UK, as stated by its Councilor Paul Lorber are as under: “The council provides a large number of services that people use on daily basis including collecting and disposing of rubbish, up- keep of roads and pavements, street lighting, care to older people and people with disabilities, schooling, licensing, food safety, and working with police on community safety.’ (Paul Lorber, page 2)iii Councilor has made it clear that Brent Council, UK has the basic aim of providing basic amenities and services to its residents. The expenditures on such activities are going to create a healthy environment within the territory of Brent Council and such an atmosphere will bring in economic success to its citizen and thereby to the country as a whole. In accordance with a publication ‘Brent Council Spending’ the net expenditure for the year 2007-08 and 2008-09 as per its spending plans are as under: It may be noted that budgeted spending on schools and other services is zero in 2007-08, and zero and -2m in 2008-09. Though the gross expenditure on these services for 2007-08 is 243.9m and 76.7 million respectively, and in 263m and 69.1m respectively in 2008-09, but these services are self sufficient and do not seek expenditure from the council. In fact ‘other services’ are showing an estimated contribution of 2 million to the total expenditure of the council. These expenditures are estimated to be incurred for the direct welfare of citizens in the Brent Council territory. Estimates for 2008-09 are based on last year spending and also have an impact of inflation and other factors as reflected in the table of changes in spending (page 3)iv in publication ‘Brent Council Spending’ as under: ‘The main reasons for spending are: Inflation £4.6m, reduced government funding for temporary accommodation £1.9m, increase in land-fill tax £0.9m, other increase in cost of waste disposal £0.8m, and adult social care £5.7m.’ The estimates for 2008-09 expenditure are based on the actual expenditure incurred during 2007-08. It will be observed that expenditures under different groupings for 2008-09 have been revised upward. This shows that expenditure of public finance in 2007-08 by Brent Council on the welfare for its residents actually served the purposes for which it was spent. The success of 2007-08 public expenditure has made Brent Council to use the tool of public expenditure in more effective manner in 2008-09. Government departments monitor public expenditure in same fashion as the private finance, even though motives of public finance are other than profit earnings. It may not be possible to comment upon the evaluation conducted in the said publication ‘Brent Council Spending’, but it is certain that public finance has become a major tool in the hands of state. The importance of public expenditure is clear from this statement of Councilor Paul Lorbor in the said publication. It states that ‘The Council has set itself ambitious aims: ensuring a bright future for our young people, boosting the local economy and helping local people with jobs, creating a safer Brent, and combating climate change by making Brent a green borough.’ (Page 2)v It is necessary that all public expenditure should satisfy one fundamental test, viz, that of maximum social advantage. That is what each government should discover and maintain an optimum level of public expenditure by balancing social benefits and social costs. Every pound spent by a government must have as its aim the promotion of the maximum welfare of the society as whole. References Read More