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Meaning and Definitions of Public Finance
In our society, everyone, whether rich or poor, owns some land for cultivation, plots for building houses, or land for establishing industries. Although the ownership of such land is in the name of individuals or institutions, they must pay annual land tax or revenue to the government for its use.
Similarly, income tax must be paid on the salary or income earned by working in government or private offices. When we buy goods like clothes, utensils, mobile phones, televisions, and vehicles in the market, we have to pay value-added tax.
Besides taxes, the government also receives income from fees, fines, penalties, donations, and foreign aid.
Thus, the government collects tax and non-tax revenue from the public and spends it on development works for the people, such as building roads, providing drinking water and electricity, building schools and health institutions, investing in irrigation and agriculture, and providing various government services through administration.
The study of how the government annually collects taxes under various headings from the citizens and business organizations of the country and spends it on the services and development works of the citizens is called public or government finance. It studies the sources from which the government receives income, the headings under which the income is distributed and spent, and how they are controlled.
Defining public finance, the famous economist Adam Smith said, "Public finance is an inquiry into the nature and principles of the revenue and expenditure of the state."
Similarly, according to Findlay Shirras, "Public finance is the study of the principles underlying the spending and raising of funds by public authorities."
Therefore, public or government finance is a branch of economics. It includes topics such as government revenue and expenditure, methods of collecting and spending government revenue, sources of government debt, economic administration, and financial control.
Government Expenditure
Government expenditure or public expenditure refers to the allocation of funds spent by the government for the administrative and development works of the country. Its main objective is to make the country economically strong by fairly distributing the income collected in the state treasury. It also aims to provide social services and security to the citizens.
Importance of Government Expenditure
- To provide administrative services: From the central administration of the country to the provincial, district, municipal, and rural municipalities, local levels have to provide daily administrative services to the citizens. The government must allocate and spend a large amount of money in the budget every year for such administrative work.
- Investment in infrastructure development: The government has to spend a huge amount of money in development infrastructures like transportation, communication, drinking water, electricity, and irrigation. Similarly, the government also has to invest in sectors like education and health. The private sector is not attracted to these sectors as they require long-term investment but do not yield much profit.
- To maintain national security: It is the primary responsibility of the government to protect any country and its citizens. The government allocates a certain budget every fiscal year to spend on the army and weapons for national security.
- To maintain good governance: The main task of the government is to establish and enforce rules and laws in the country. For this, police administration, prisons, and courts are required. The government allocates a large amount of money under public expenditure every year to make the work of these organizations effective.
- To reduce economic inequality: In countries with open economies, there can be economic inequality between citizens, i.e., the economic difference between the rich and the poor. The government should impose progressive taxes on high-income and economically prosperous classes and invest the proceeds in sectors that directly benefit the economically backward. This type of tax policy is managed through public finance.
Classification of Government Expenditure
The government expenditure of any country is mainly classified into three parts. The Government of Nepal also classifies public expenditure under these three headings, which are briefly described below:
A. Current or Administrative Expenditure:
Current or administrative expenditure is the detail of all expenses incurred by government administrative bodies for providing various services in a fiscal year.
The allocation of expenses under current expenditure is as follows:
(a) Constitutional Bodies: Constitutional bodies of Nepal include the Supreme Court, Auditor General, Public Service Commission, Election Commission, etc. The government arranges necessary administrative expenses for the daily operation of these bodies.
(b) General Administration: General administration includes the Council of Ministers, various ministries, various departments, district administration offices, police, and prisons. The government allocates funds in the annual budget for administrative work in these bodies.B. Capital or Development Expenditure:
Capital expenditure is also called development expenditure. The government allocates capital expenditure for development works with long-term impact, such as building construction, purchase of vehicles, purchase of machinery and furniture. The allocation of expenses under this heading is as follows:
(a) Expenses incurred by constitutional bodies in infrastructure development.
(b) Expenses incurred in administrative reforms under general administration.
(c) Expenses incurred in planning and data collection under economic administration.
(d) Expenses incurred in education, health, drinking water, local development, and other social services under social services.
(e) Expenses incurred in agricultural development, irrigation, land reform, forestry, industry, mining, transportation, etc., under economic services.
(f) Expenses incurred by the state in rescue operations during emergencies under miscellaneous.
C. Financial Management:
Recently, financial management has been included as a major heading of government expenditure. The Government of Nepal has also implemented this system from the fiscal year 2068/69 to align the classification of expenditure with international standards.
This includes the following subheadings:
(a) Net loan investment
(b) Net share investment
(c) Net foreign debt
(d) Net domestic debt
Government Revenue
Just as income is necessary to run a household, government revenue is essential to run the administrative and development works of a country. Government revenue refers to the income received by the government in the form of taxes, revenue, and non-tax revenue, and foreign aid. It is mandatory for any nation to receive public revenue for administrative and development works.
Sources of Government Revenue
The government receives revenue from various sources. The revenue received by the government is generally classified into the following three categories:
A. Tax Revenue:
Tax is the amount that citizens and institutions of any country must pay to the government compulsorily as a certain percentage of the income and profit earned by profession and business. Tax revenue is considered the main source of income for the government.
Under this, the government receives tax revenue from the following sources:
(a) Customs Duty: Customs duty is the tax levied by the government at border crossings on the import and export of goods and services between two or more countries. In the context of Nepal, the government collects customs duties from offices established at border crossings with India and China and international airports.
(b) Production and Consumption Tax: To broaden the tax base, the government can levy various types of taxes on the production and consumption of goods and services. The main taxes on goods and services include value-added tax, sales tax, entertainment tax, contract tax, excise duty, road tax, etc.
(c) Land and Registration Fee: This includes land tax on houses, plots, agricultural land, and other land, taxes levied by the government on the purchase and sale of real estate, land registration fees, and taxes levied on new house construction and registration.
(d) Property, Profit, and Income Tax: Property tax includes house tax on houses built in cities or municipalities, land tax, vehicle tax, etc. Profit tax includes taxes on profits earned from industries, trade, and business, and taxes levied on the sale of shares of profit-making institutions. Similarly, various rates of taxes levied on the income earned by individuals or institutions and taxes levied on interest earned from bank deposits fall under government income tax.
B. Non-Tax Revenue:
Non-tax revenue is received from the following sources other than tax revenue:
(a) Fees and Licenses: Fees are the amounts received by the government when registering private organizations' companies and providing an environment for education and training. Similarly, the government also receives revenue by issuing driving licenses to the general public and licenses to keep weapons in homes and institutions. Similarly, domestic and foreign tourists have to pay the prescribed fees when mountaineering, visiting national parks, museums, zoos, etc., which fall under non-tax revenue.
(b) Fines and Penalties: Fines and penalties are the amounts that individuals and institutions have to pay to the government for violating the prevailing laws of the country. Similarly, consumers have to pay fines to the government for delays in paying electricity bills, water bills, vehicle and institutional license renewal fees. The purpose of fines and penalties is not to generate revenue but to prevent undesirable activities.
(c) Income from Government Production: Public institutions established with government investment can generate revenue by producing and selling goods and services. For example, institutions like Nepal Telecom, Dairy Development Corporation, and Nepal Oil Corporation generate income by selling goods and services, which are considered sources of government revenue.
(d) Other Sources: Gifts and grants voluntarily provided to the government by individuals, institutions, and countries, such as grants given to help those displaced by earthquakes, floods, landslides, and soil erosion, are counted as income. Similarly, property of individuals without heirs and dissolved organizations that no one claims is also considered government income.
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