Ever wondered how the government raises and manages resources to meet its ever-increasing expenditure. Government needs funds for the industrial and economic development of the country. Money is required to provide more employment opportunities, encourage investments and increase social benefits. The point is achieving government objectives and ensuring equal distribution of income all boils down to public finance.
Not to forget that one of the main activities of the government is to provide basic amenities like education, transport, healthcare, sanitation facilities and much more. For this, there must be a constant flow of income. This article will explore how the government sources funds to carry out developmental projects and manage the economy.
What is public finance?
Public finance comprises of two words: public and finance. While public refers to government, finance is simply the management of money. Hence, public finance literally means the role of government in the allocation of resources to manage public affairs. The definition of public finance is broad and it’s keeps broadening as the economy changes. But to put simply, public finance looks into the public revenue and public expenditures for the functioning of the government and adjusting one for another to achieve public goals.
Public finance is the key to achieving stable economic growth, macroeconomic stability, equitable distribution of income, proper allocation of resources, infrastructural development and so on. It can therefore be referred to as the backbone of any stable economy.
What are the main sources of public finance?
The main sources of income for government include:
Individuals, a body of persons, businesses or institutions contribute their wealth in the form of tax to carry out public affairs. Tax is compulsory and it is paid without the taxpayer expecting any gains or services rendered in return. Hence, failure to pay tax is punishable under the law and no one oppose on the ground that they are not getting any benefits from it.
Commercial revenue and profits
The government stands as a business enterprise providing goods and services to the public. For instance, the transportation services run by the government, holiday resort, trading corporation, posts and telegraphs, use of government properties, mining rights are all good source of public finance. The public avail of these, the government earns profits
Fees are payments made for services rendered by the government for public benefits. These can be court fees, education fees, stamp duties and much more.
Fines and penalties
These are fines imposed on people who violate governmental law. The aim is not to raise funds for the government but to ensure people follow the law and order of the country. Therefore, financial fines and penalties accrued are relatively small. Common examples of fine is money paid for the violation of traffic rules, criminal fines
Gifts are money voluntarily given by an individual or non-governmental donors to the government. This means they are given to the government free of cost. That is why they are unreliable and generally contribute a very small part of the public revenue. However, gifts serve great purposes especially during wartime or emergencies as relief fund or defense fund.
Grants can be received from one government to another. State governments sometimes received grants from the federal government to carry out certain functions. Foreign governments as well can give grants to another country’s government to support them. This is called foreign aid and this source is uncertain. Usually, developed countries sometimes help poor and developing countries for specific reasons. This may be military aid, food aid, technological aid and so on.
Governments sometimes provide certain social benefits or facilities to the public which can attract levy. This means when public authorities provide certain special facilities in certain areas such as construction of roads, water supply, street lighting. It will benefit the residents, and as a result, the government may request for a special levy or increase the values of the rents of properties.
Of course, the government sometimes decides to collect loans to carry out certain functions. This can be from individuals or institutions within the country and it can be in the form of bonds, deposits, etc. Loans can also be taken from foreign countries or international financial institutions.
This is one of the best ways to generate money. Public authorities can decide to invest in any sector of the economy that proves profitable. They can also partner with businesses or institutions to garner Investment gains.
Governments will always require funds to carry out their duties and these are major sources of income. While some reliable, great sources of income, soke doesn’t contribute much to the public finance and there are sources that are also unreliable. Whatever the case, the government has the responsibility to ensure less borrowing, and generate income to ensure economic growth and stability.