Showing posts with label Public Finance. Show all posts

Concept of Public Finance with Its Nature, Scope, Functions and Subject Matter

Concept of Public Finance

Significance and scope of government involvement in economic decisions depends upon the political ideology of government structure and roles to a great extent. History has revealed that there have been three types of economic systems.

In a capitalistic economy economic decisions (and thereby the economic activities) are done by the private sector. Each economic unit operates in accordance with the economic rationality being guided by the market mechanism with an objective of income maximizing criteria. In such system government has only limited role, mainly as the facilitator and regulator.

A communist (controlled) economy is dominated by the state where economic decisions and activities would not be guided only by the economic maximizing criteria. Market mechanism is assigned a marginal role.

In a mixed economy there is the co-existence of both the private and public sectors in economic activities. Government is to perform the role of an investor, facilitator and regulator. However, in modern times, almost all countries have mixed economy where the scope and involvement of public and private sector may vary. It is fairly common to justify the need for and presence of government involvement and intervention in economic activities besides the fundamental (basic) functions.

Public sector economics or Public finance deals with the questions of collective wants (i.e. the wants of the community as a whole) and their satisfaction. Public finance aims at maximizing social welfare or social benefits by efficient use of social goods. Collective wants are those which are demanded by all members of the community in equal or, more or less equal measure. Defense, education, public health, infrastructural facilities like power, transportation and communications, etc. are examples of the collective wants. Goods and services produced to satisfy collective wants are known as social goods. The features of social goods are:

Social goods are not divisible;
There is some compulsion in providing social goods; and
There is no exclusion in social goods.

The grounds for state involvement and interference in economy are:

Distortions in production structure and failure to create reasonable employment by market mechanism;
Need for the maintenance of economic stability with control of trade cycles (mainly in the developed countries); and
To promote the rate of economic growth and distributive justice {mainly in the developing countries).

DEFINITIONS OF PUBLIC FINANCE

“The term public finance has come by accepted usages, to be confined to a study of funds raised by governments to meet the costs of government.” - Carl C. Plehm

“Public finance deals with the income and expenditure of public authorities, and the manner in which one is adjusted to another.” - Dalton

“Public finance is the study of the principles underlying the spending and raising fund by government”. - Findlay Shirras

“Public finance deals with the finance of the public as an organized group under the institution of government. It thus deals only with the finance of government. The finances of the government including the raising and disbursement of government funds.” - Bastable

“The complex of problem that center around the revenue - expenditure process of government is referred to traditionally as public finance. While operations of public household involve money flows of receipt and expenditure, the basic problems are not the issues of finance. We must think of our task as an investigation into those aspects of economic policy that arise in the operation of the public budget.” - Musgrave

“Public finance is a field of inquiry that treats the income and outgo of governments. In modern times, this includes four major divisions: public revenue, public expenditure, public debt and certain problems of the fiscal system as a whole such as fiscal administration and fiscal policy.” - Harold Grooves

NATURE AND SCOPE OF PUBLIC FINANCE

The nature and scope of public finance has been changing with the changes in the nature and scope of governmental activities as per the need of the economy (society). The scope of governmental activities is to a great extent by the political ideology of the state/government.

In broad sense, the nature of public finance may be categorized as the neutral or non-regulatory and regulatory, mainly on the basis of interfering and influencing the economy. The nature and scope in different periods is determined being guided by different theories.

Pure theory of Public Finance (1776-1880’s): Early classical economists like Seligman, Say, Ricardo advocated the scope of public finance limited to the study and analysis of only the operation of the treasury just for performing the minimum necessary activities by government without any considerations of welfare concept.
Socio-political Theory (1880’s-1930): The neo-classical writers like Wagner, Marshall, Pigou, Edgeworth advocated the social welfare considerations to included in the scope of public finance.
Functional finance Theory: Since 1930’s depression, Keynes, Dalton, Lerner, Hansen like economists advocated government involvement and interference in the economy as per the necessity for maintenance of economic stability, and thus, the nature of public finance being a regulatory one.
Activating finance theory: After the Second World War {mainly since 1d950’s), with the concern about economic development of the developing countries, public finance is to activate the economy with the government involvement as an investor, facilitator and regulator.

FUNCTIONS OF PUBLIC FINANCE

Allocation function: It is concerned with the use of economic resources on what type of goods and services’ production with the objective of growth promotion as well as whether to produce in the public sector or private sector.
Distribution function: It is concerned with the distribution of national income in n equitable way as accepted by the society, mainly to promote the distributive justice.
Stabilizing function: It is concerned with the maintenance of economic stability with the control of economic fluctuations, inflation and correction of adverse balance of payments (BOP).

SUBJECT MATTER OF PUBLIC FINANCE

The subject matter of public finance is the areas of study in relation to the operation of the treasury and the repercussion of different policies operated by the treasury. The subject matter includes:

Public Revenue:- Includes the concept of government revenue and tax, principles of taxation and its effects and role in the economy.
Public Expenditure:- Includes the study of the concept, principles underlying the allocation of public expenditure, and its effects in the economy.
Public Debt:- Includes the study of the concept, sources, need, burden and principles of public debt management.
Financial Administration:- Includes the study of the concept, theories and process of government budgeting.
Fiscal Policy:- Includes the study of mainly the concept and the use and adjustments of the public financial instruments to achieve the desired economic objectives like economic stability, growth and distributive justice.

You may also like this:

Concept of Public Debt and Need for Public Debt
Fiscal Policy: Role and Evolution of Fiscal Policy
Internal and External Sources of Public Debt
Public Expenditure: Nature and Principles of Public Expenditure
Concept of Managerial Finance

Stages of Public Policy | Subject Matter of Public Policy

The public policy can be divided into four stages as follows:

1) Policy Formulation

At first, in the view of people’s demand or realizing the need of that by the government, itself, the government authorities formulate any policy. After that those policy is announced through various media like radio, television and public speech. The basis of formulating a public policy are the country, time, situation, geo-political condition, economic and political level of the people and so on. The principles propounded by various scholars on the formulation of public policy are also used. These principles are found to have given emphasis on the factors such as the need to have capacity to face the problem, need to select appropriate alternative after scrutinizing the possible alternatives of the solution of the problems, need to have appropriate adjustment between available means and ends.

Public policy is formulated with a view to serve majority of people’s interests; protect minority of people, maximum utilization of resources, end conflict between classes and raise living standard of people. Among the different stages of public policy, formulation stage is regarded as the first and foremost stage. The sources of public policy are as follows:

Voice of people: The voice of people and the constitution of the country, directly or indirectly expressed public desire, slogan, procession, the values directed by socio-religious, cultural, natural conditions, existing tradition are the source of public policy formulation.
Political parities: The organized institutions established with different objectives, pressure groups including political parties, opinion of concerned experts, election and so on are also the sources of public policy.
International trends: The international trends, the economic, political, social policies of neighboring countries, the policies of international multilateral institutions etc. are also the sources that affect the public policy.

In Nepal as well, legislature, executive, the administrative mechanism of Government of Nepal under delegated power and other constitutional organs basically involve in policy-making. The work of implementation is done by the administrative agencies. A separate committee involving different agencies can do the job of evaluation.

2) Policy Interpretation

There is a possibility that the terms and sentences of the devised policy may denote wrong meaning. To check this, the terms and sentences of the policy statements are interpreted. The policy interpretation may also be called policy analysis. And in policy formulation, different classes, scholars and authorities are involved in policy analysis as well. The public policy is affected by different factors. For example, the political principles always affect the government policy. Since public policy is the result of the relation of groups, group formation also affects policy. Similarly, since there is dominance of elite class in the state, the wish of the elite class may also affect public policy.

3) Policy Implementation

In the third stage after policy analysis, there is policy implementation. To use the matters mentioned in policy statement in actual practice is called implementation. Since policy statement is meaningless without implementation. It is equally necessary to give attention on implementation aspect. If the objective is not realized according to policy, policy powers to be a useless slogan. The implementation is usually done through administrative bodies. The degree of the use of resources, inaction or negligence, possibility of success or failure and so on are looked in the implementation stage itself.

4) Policy Evaluation

In the final stage after implementation of policy is evaluated. Under policy evaluation, the evaluation of whether policy was implemented in reality or not is made. Likewise, a detail scrutiny is also made regarding the desired impact of the policy, the problem in implementation of policy, and the measures to solve problems. The evaluation is made on the involvement of different bodies on the basis of the seriousness, subject matter and so on of the public policy. Such evaluation may be made by the supreme legislature itself or also by other bodies of the government according to the constitutional provision. The auditor general may make evaluation over the executive. Similarly, evaluation can also be made by forming a committee or commission.

Subject Matter of Public Policy

Under subject matter of public policy, the following headings are included.

i) Policy Making Process

The policy making process is included under policy analysis. The policy making process is classified under four heads.

Political policy making: The policy is made in accordance of political parties’ commitment during the time of election. The pressure groups such as press, communication, speech section etc. plays a vital role in political policy making. Though, political policy making is formulated by the elected parliament.
Executive policy: The policy which makes implementation of the general policy made by the existing parliament. To implement the policy formulated by the parliament effectively is the responsibility of executive. Furthermore, the executive can make different policies under main policy.
Administration policy: The policy made on the basis of administrative suggestions is called administrative policy. The efficient persons in the administration implement the public policies. The administrative persons present their opinion and suggestion in the concerned bodies about policy making, implementation, effects on society and the alternatives.
Technical policy: The policy taken with the works of technical nature is known as technical policy. This policy making and implementation is done by the skilled persons in the technical services.

The political parties, public officials, non-officials and external sources are directly as well as indirectly involved in policy making.

ii) Policy Contents and Specific Issue Areas

The merits and demerits of different provisions made in the law are explained under this heading. These topics are population, employment, environment, water resources, money, banking, public finance etc.

iii) Policy Analysis, Evaluation and Impact Techniques and Methodologies

After the policy making, implementation is made. Then, impact of public policy on people’s lives is evaluated. The policy-makers and the evaluators use specific methods or techniques. These methods and techniques are operational research methods, mathematical and statistical techniques, logical proof etc.

iv) Particular Approaches to Policy Studies

The definite methods related to policy study are studied under this topic. Public study means the study of public choice and the study of public output etc. The topics such as the criteria of determining individual and collective rationality are also studied under it.

Pages