Public Finance

CONTENTS

1. Definition and Scope of public finance
2. Functions or objectives of public finance
3. Sources of government revenue
4. Items of government expenditure
5. Classification of government revenue and expenditure
6. Reasons for increase in government expenditure.

Public finance is the management and control of government income and expenditure to achieve government’s policy objectives.

It involves a detailed analysis of the various sources from which the government derives its income (revenue), the items on which the government spends its money and the impact of such government expenditure on different aspects of the economy.

FUNCTIONS / OBJECTIVES OF PUBLIC FINANCE

1. It performs equitable distribution of resources among individual, tiers of government and the various sectors of the economy.
2. It is use to achieve and maintain favourable balance of payments and economic development.
3. It provides a general parameter for monitoring the economy in terms of growth and stability.
4. It is used to achieve the economic objectives of the government.
5. It provide fund for transfer payments e.g pension fund, unemployment benefits, subsidies etc.

SOURCES OF GOVERNMENT REVENUE

            The main sources of government revenue are

1. Taxes: This forms a major source of revenue to governments all over the world. These taxes may be direct or indirect taxes.
2. Royalties – This is the money paid by companies engaged in mining activities to the government for rights to explore and exploit mineral resources deposits
3. Earning (income) from government investments e.g. interest, rent, dividends, profits from government owned business property.
4. Grants and aids from individuals and institutions at home and from foreign governments and international organizations.
5. Borrowing:- This could be internal or external borrowing e.g sale of government securities or loans from African Development Bank, IMF, World Bank, Pars Club etc
6. Fees, licenses and charges, fines etc eg vehicle licence fees, liquor licence fees, fire arms licence fees, international passport fees, court fines, Road Safety Commission fines etc
7. Other sources e.g. Tolls, rates etc.

GOVERNMENT EXPENDITURE

            The main items of government expenditure are

1. Defence or National Security: The government provides for the Army, Air force, Navy and the Police to maintain law and order and defend the country from external aggression.
2. General Administration: The government spends money in maintaining the Civil Service and the various officers of the government in the ministries, agencies, corporations, parastatals and departments
3. Social, educational facilities, water supply pipe borne water etc and pension benefits for retires.
4. Economic Infrastructure e.g roads, bridges ports, agriculture telecommunication, power and electricity etc.
5. Servicing of the National Debt: i.e. the repayment of the principal and interest of both external debts
6. Direct Productive Service: Government sometimes participate directly by organizing productions of some commodities.

CLASSIFICATION OF PUBLIC REVENUE

            Government revenue can be classified as

1. Recurrent Revenue:/ This is the total amount of revenue collected by the government of a country from their regular or yearly basic e.g taxation, fees, licences, fines etc.
2. Capital Revenue:- These are revenue from irregular or extraordinary sources. They are sources of revenue used for meeting expenditure on heavy capital projects e.g grants or loans collected by the government for the purpose of building a project e.g railway line.

CLASSIFICATION OF PUBLIC EXPENDITURE

Government expenditure can be classified as:

1.         Recurrent Expenditure: – These are expenditure incurred in the running of the day to day activities of the government. They are expenses that re-occur within a fiscal year i.e. items / expenses that last for less than a year e.g wages, salaries, stationery, fuel for official cars, cost of maintaining roads, repairs expenses on dams etc.

2.         Capital Expenditure:- These are expenditure (investments) on project that last for more that one year. They are used to acquire assets that are of permanent nature e.g construction of roads, bridges, government buildings, purchase of cars etc.

In most cases, recurrent expenditure is spent in maintaining capital projects.

REASONS FOR INCREASE IN GOVERNMENT EXPENDITURE

There has been an astronomical increase in the magnitude of government expenditure. Some of the reasons for this include:

1. Increase in population leading top higher administration costs
2. The effect of inflation (general increase in price level) on the cost of projects undertaken by the government.
3. The effect of devaluation (depreciation) of the Naira on a largely import dependent economy of Nigeria.
4. The increasing cost of maintaining democratic institutions and large number of political structures i.e. states, local governments and their officials.
5. Greater demand for social and economic infrastructures and the cost of maintaining existing ones.
6. The developmental / industrialization programmes of the government requires a lot of capital outlay to import the needed equipment / machines
7. The cost of servicing the country’s huge stock of internal and external debt which has kept increasing because of interest capitalization
8. The high prevalence of corruption and over invoicing of the cost of projects by government officials and politicians.

FISCAL POLICY

A fiscal policy may be defined as a government plan of action concerning the raising of revenue through taxation and other means and deciding the pattern of expenditure to be applied.

Fiscal policy therefore involves the use of government income and expenditure instrument to regulate the economy with the aim of achieving some set economic objectives

The economic objectives of the government on fiscal policy includes.

1.         Maintenance of stable prices / control of inflation and deflation.

2.         Equitable distribution of wealth

3.         Efficient allocation of resources

4.         Provision of full employment

5.         Stability in the exchange rate of the national currency

6.         Maintenance of favorable balance of payments

EVALUATION QUESTIONS

1.         Explain any two items of government expenditure

2.         Distinguish between capital Expenditure and Recurrent Expenditure.

WEEKEND ASSIGNMENT

1. Which of the following is not an item of capital expenditure (a) Building of dams (b) Supply of electricity (c) Payment of interest on loans (d) Building of harbours.
2. Public expenditure on education and health is known as expenditure of (a) general services (b) social services (c) commercial services (d) economics services.
3. Which of the following is an item of recurrent expenditure (a) construction of highways (b) building of dams (c) payment of salaries and wages (d) building of a new university.
4. Which of the following items cannot be classified as essential government expenditure (a) construction of roads (b) servicing of external debts (c) maintenance of public hospitals (d) importation of luxury consumer goods.
5. Which policy is used to adjust government revenue and expenditure so as to produce a desirable effect on the economy (a) monetary (b) business (c) physical  (d) fiscal.

THEORY

1.         Define Public finance

2.         State five factors responsible for the increase in government expenditure in Nigeria. 

READING ASSIGNMENT

1.         Comprehensive Economics for SSS by J. u.

            Anyaele Page 148 – 150.