Public Finance is the study of the role of the government in the economy.

It is the branch of economics

which assesses the government revenue and government expenditure of the public authorities and the
adjustment of one or the other to achieve desirable effects and avoid undesirable ones.

The purview of public finance is considered to be threefold: governmental effects on (1) EFFICIENT
ALLOCATION OF RESOURCES, (2) DISTRIBUTION OF INCOME, and (3) MACROECONOMIC STABILAZATION.

Public Finance according to Rosen (1999), is the field of economics that analyses government taxation and
spending policies. Key problems relate to the use of real resources. Labor, capital, land and
entrepreneurship. Other treatments of public finance take the form of highly technical considerations of
individual taxes, government borrowing and debt, the financing of local and regional governments and so
on.

Public Finance is an essential foundation but often neglected foundation for the study and practice of
social policy, public management, economics and other applied sciences.

Tax and Spend model as a distorted concept of public finance:

- taxation is not the only source of public finance

- public finance is not spent only on public services or welfare payments

- ‘the public interest’ is conceptually vague and meaningless in practical terms

Public Finance (comprehensive definition):

- it is money raised from a wide variety of sources by the state and its agencies

- including taxes, sales, fees, charges, borrowing, lotteries, donations and bequests, payments in
kind or so on.

- disbursed within the public sector, and often in the private and voluntary sectors

- to individuals, families, companies and service organizations

- both at home and abroad

- spent in the form of welfare payments, subsidies, grants, wages and salaries, rents, insurance
premiums, interest and amortization payments on public debt, international transfers, humanitarian aid,
payments for construction projects, equipment and other inputs from private sector companies.
Simply stated, PULIC FINANCE comprises any revenues or expenditures passing through state budgets,
derived from whatever source and however spent. (State Budget / Government Budget- forecast by a
government of its expenditure and revenues for a specific period of time. In national finance, the period
covered by a budget is usually a year, known as a financial or fiscal year, which may or may not correspond
with the calendar year.

PUBLIC VERSUS PRIVATE

-expenditures on over-the-counter medicines are classified as public finance in respect of the part
of spending supported by publicly funded exemptions and concessions, the remaining part of expenditure
not so supported being classified as private because it does not enter public accounts.

PUBLIC ACCOUNTS:

- Citizens have rights to receive particular services deemed essential for their livelihoods, for
example access to education and/or health services
- The state should make financial provision in order for those rights to be secured

Where no such right exist whether explicit or implicit, then no public finance is required. Where such
rights do exist, the amount of public finance required to secure them will then depend upon operational
decisions about service provisions.

2 Main Options for service delivery:

1. Direct provision by the state

2. The state enables services to be provided by the private and/or voluntary sectors

PHILOSPHICAL UNDERPINNINGS OF PUBLIC FINANCE

Political philosophy remains a vibrant subject for debate in considering the relationship between the
citizen and the state. This relationship impinges on the nature and scope of public finance.

Public finance is about much more than just money it is about political philosophy. it reflects the
constitutional and cultural relationship between individual citizens and their governments as national,
regional, and local levels. It reflects the rights and responsibilities of individual citizens, not just for their
own livelihoods but also for those of their families, neighborhoods and local, regional and national
communities.
LIBERTARIAN and COLLECTIVIST political philosophies are much more absolutist and hence much clearer
in terms of their beliefs than is the variable spectrum of neo-liberal philosophy because the latter is
potentially very wide, reflecting different interpretations of ‘primacy of the individual’, ‘limited positive
rights’, ‘enabling state’, ‘mixed economy’, and others.

LIBERTARIANISM

- Strongly believes in ‘individual responsibility’, the state only intervening to protect citizens
from coercion, interference and discrimination.
- The state therefore should only provide services protecting those ‘negative rights’, namely
the system of justice and the associated with law, order and protective services such as the
police, courts, prisons, probation and rehabilitation services.
- There is only minimal need for public finance
- There is no such thing as social justice: a person’s life chances are simply the result of market
outcomes.
- These outcomes may be fortunate for some and unfortunate for others but they are not
unfair.
- They merely reflect one’s innate abilities to earn one’s livelihood through individual flair,
initiative and hard work.
- Charitable giving and charitable work, rather than state action should be relied upon to help
those unfortunate in lacking innate abilities for self-support.
- There is no moral case for equality, no such thing as society, no need for modern welfare
state, no need for public finance.
- The private sector can should be relied upon to provide individuals and their households with
the services they are willing and able to pay for.
- Private finance is therefore the dominant of finance, dispensing almost completely with the
need for public finance.
- Government intervention is counterproductive because it stifles individual initiative,
destroying the culture of charitable giving and charitable work, creating a dependency
culture.
- They lose the ability to provide for themselves an adequate standard of living.
- People may believe that they have a right to public finance simply because they have paid
taxes. The very payment of taxes therefore creates the need for more taxation.
NEO-LIBERALISM

- also believes in individual responsibility however they believe that the market outcomes may be
unjust because not everyone has the same opportunity to earn one’s livelihood because their abilities,
skills and determination varies.

- the state should ensure that everyone has the same opportunity to secure an adequate standard
living

- limited positive rights are ensured by the government to be able to create equal opportunity to
the people with certain rules and limitations.

- limited positive rights examples are the free tuition in some universities to become employable,
free health care services to ensure fitness, jobs that discredit any form of discrimination, and financial
assistance for those who cannot support themselves like the PWDs and Senior Citizen (SSS).

- there is a need for substantial amounts of public finance

- the state’s role is to enable people and families to look after themselves, rather than being the
first port of call in times of need

- the state enables the people to invest in themselves, building their own ‘human capital’ to secure
equal opportunity of the people however this does not guarantee equal outcomes since they are being
rewarded through their skills and abilities.

- public finance should complement with private finance

COLLECTIVISM

- Does not accept the concept of the autonomous individual because an individual is a part of
a community and cannot function without it.
- Mutual dependence requires collective rather than individualized provision to meet social
needs.
- People have full positive rights thus markets have to be directly controlled by the government
to ensure not just equal opportunities rather equal outcomes.
- Private property rights are replaced by ‘social ownership’ and the building of social capital.
- Private profit must not be at the expense of social welfare (e.g. smoking)
 - The state must be expansive, becoming all-encompassing through highly progressive taxes
used to finance the comprehensive public provision of goods and services in delivering the
‘unconditional welfare state’. (See: social justice 😊)
- Social welfare is the main concern of this theory of public finance and it can be best delivered
through skewing of taxes and public services in favor of the disadvantaged low-income groups
in order to obviate all such institutionalized and class-based disadvantage.
- Public finance replaces private finance

OVERVIEW OF THE THREE POLITICAL PHILOSOPHIES

- Though these political philosophies have differing implications with the intervention of the
government in the market, one common theme is that they all recognize the benefits of
economic growth.
- Growth of national output is seen as essential for improved individual and/or social welfare
in the longer term.
- These philosophies obviously differ in terms of the most effective way in achieving economic
growth
- State intervention or the lack of it is concerned with economic efficiency as well as equity.
- Libertarians argue that private interests should take precedence over public interests and that
the state has no right to redistribute incomes and wealth in pursuit of irrelevant and
unsustainable notions of social justice.
- Collectivists argue the opposite case, rejecting market outcomes and taking the view that
individuals belong to the civic community whose interests are safeguarded by the collective
provision of services.
- Neo-liberalism has arguably been the more influential political philosophy in terms of more
recent social, political and economic reforms in most countries.

THE NEO-LIBERAL RESURGENCE

- The Great Depression during the 1930s led to a substantial level of unemployment in western
economies apparently demonstrating the failure in free markets to promote the public
interest (contrary to the writings of Adam Smith)
- Developed countries adopted the more interventionist stances in general accepting
arguments by Keynes, Gailbraith, et al, that governments could and should use public finance
 (government expenditures, borrowing and taxation) to modify market behavior in order to
promote full employment and so promote the public interest.
- Most developed country adopted a Keynesian approach towards the management of the
economy, seeking to maintain the totality of demand for goods and services so as to create
and sustain full employment.
Did it by varying levels of public finance as follows:
o By borrowing so as to spend their way out of prolonged recession or temporary
cyclical economic downturn
o By raising more public finance than was spent so as to minimize any inflationary
consequences of full employment
- They also used public finance to fund comprehensive schemes of social insurance covering
loss of earnings due to unemployment, sickness and retirement, the state acting as a cradle-
to-grave ‘safety net’.
- Keynesian economic policies seemed to work from the late 1940s through the early 1970s.
however, it became increasingly difficult for the government to use public finance to maintain
full employment. Public finance began to account for an ever-increasing proportion of
national income in most developed countries as public expenditures, public borrowing, public
debt and taxation rose inexorably.
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