Public Finance

What is Public Financing?

• Public finance is the management of a country’s revenue, expenditures, and debt through various Government, quasi-government institutions, policies, and tools.
• Components of public finance: public expenditure + public revenue + financial scrutiny + fiscal policy + financial administration + public borrowing.

Public Finance and Budgeting in India: India’s Annual Financial Statement ( Art 112)

• The term budget is nowhere used in the Constitution.
• Budget is referred to as the Annual Financial Statement in the constitution under 112.
• The Rail Budget was separated from the General Budget on the recommendations of the Acworth Committee in 1924.
• However, it was merged again in 2017.
• Objectives:
  • Resource Allocation
  • Redistribution of Income
  • Stabilisation in the Economy
• Components:
  • Receipts:
    • Revenue Receipts:
      • Tax Revenue: Tax collected by government in the form of direct and indirect tax.
      • Non-Tax Revenue: Profits and dividends from PSU’s, grants received by government, fiscal and general services, interest on loan forwarded by government, fees, penalties, fines etc.
    • Non-Revenue Receipts: They are loans taken by the government which possesses financial liability on the government.
  • Expenditure:
    • Revenue Expenditure: Broadly, any expenditure which does not lead to any creation of assets or reduction in liability is treated as revenue expenditure. Examples of revenue expenditure are salaries of government employees, interest payment on loans taken by the government, pensions, subsidies, grants, rural development, education and health services, etc. The purpose of such expenditure is not to build up any capital asset, but to ensure normal functioning of government machinery. It is recurring in nature and incurred regularly.
    • Capital Expenditure: An expenditure which either creates an asset (e.g., school building) or reduces liability (e.g., repayment of loan) is called capital expenditure. Repayment of loan is also capital expenditure because it reduces liability. It is non-recurring in nature.

Types of Budgets

• Balanced Budget:

  • A balanced budget occurs when receipts equal expenditures, meaning income matches total spending. It moderately boosts aggregate demand and is suitable when the economy is near full employment.

• Surplus Budget:

  • A surplus budget happens when receipts exceed expenditures, meaning more money comes in than goes out. It reduces aggregate demand and is recommended during high inflation.

• Deficit Budget:

  • A deficit budget arises when expenditures exceed receipts, meaning the government spends more than it earns. It boosts aggregate demand and is useful during economic depressions.