Public Finance: Definition, Purpose, Principles and Components

Definition of Public Finance

Public finance can be defined as the collection of revenue by the central government and local government and all the expenditure (spending) of revenue in the provision of public utilities. According to Findlay Shirras (year) public finance is the study of the principals underlying the spending and raising of fund by public authorities.

Principles of Public Finance

The following principles shall guide all aspects of public finance in the Republic–

  • There shall be openness and accountability, including public participation in financial matters;
  • The public finance system shall promote an equitable society, and in particular—
  • The burden of taxation shall be shared fairly:
    • Revenue raised nationally shall be shared equitably among national and county governments; and
    • expenditure shall promote the equitable development of the country, including by making special provision for marginalised groups and areas;
  • The burdens and benefits of the use of resources and public borrowing shall be shared equitably between present and future generations;
  • Public money shall be used in a prudent and responsible way; and
  • Financial management shall be responsible, and fiscal reporting shall be clear.

Components of Public Finance

The components of public finance include:

  • Public income/revenue: This refers to government income collected from various sources. The main sources of public revenue include taxes, fees, fines and penalties, income from properties, interest from loans repayment, sale of real assets and royalties.
  • Public expenditure: This refers to spending by the government. Public expenditure covers the canons or the principals which govern it and its effects on production, employment, income distribution, stability and growth. It also includes reasons for increase in public expenditure and changes in the pattern.
  • Public debt: When public revenue falls short of public expenditure, the government borrows to meet the gap. This is the public debt. Therefore public debt includes reasons, methods and sources of public debts, its effects on production, consumption, income distribution and economy, the burden of public debt and methods of debt redemption.
  • Financial administration: The aim of financial administration is to control processes and operations of public revenue, public expenditure and public debt. The scope of financial administration includes the collection, custody and disbursement of public money, the coordination of expenditure according to a well-formulated plan, the management of public debt and the general control of the financial operations of the state. It also includes the preparation of the budget, its execution and auditing of the state.

Purpose of Public Finance

  • To ensure redistribution of wealth to all persons in the society i.e. both the rich and the poor are taxed and poor are given inform of housing, health care, education and other amenities
  • To control the consumption of harmful products. heavy taxes are levied on commodities e.g. alcoholic beverages and cigarettes
  • Provision of public goods and services. This include police protection, maintenance of law and order, public health care, disaster management and public infrastructure. This all is aided by public finance through the government.
  • It ensures collection of revenue where the government uses revenue to finance its activities
  • It also promotes equitable regional development. The government tries to attain balanced regional development throughout the country. This is done through equitable resources allocation achieved through public finance.
  • To promote government investment. The government invests in particular projects e.g. electric power generation and distribution, construction of infrastructure and establishing industries. Such investments help to spur economic activities leading to economic growth and development throughout the country.
  • Promoting economic stability. The government adopts suitable policies aiming at spurring economic activities
  • Can reduce inflation i.e. the government can impose high taxes to reduce the high money in the economy.

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