MUNICIPAL (PUBLIC) FINANCE-PRINCIPLES

FINANCE - INTRODUCTION

Finance is an all pervading activity.

A thread running through all affairs.

Can not be hived off into single section or

regarded as a separate aspect.
Every one of us uses resource.

A judgment about like benefits and cost

incurred (Decision Making) is inevitable.
FINANCE - INTRODUCTION

 Limited resources - unlimited wants.

 Application of limited resources to competing
ends offering different advantages.
 Weighing allocation of resources to one or
more purposes against the relative benefits of
devolving resources to competing ends.
 Dynamics of ‘finance’ form core of municipal
finance like any other activity of our life.
 But it is not for ‘private interests’ but for ‘public
interest’.
FINANCE - PRINCIPLES

 Dynamics of ‘finance’, dictate certain

hard realities not to be overlooked by
municipal finance or public finance
 Everything has cost.
 There is no magic wand to wipe out cost.
 Cost recovery first and foremost objective
 Failing that minimisation of loss is the next
objective
 Maximisation of returns whenever and
wherever possible
FINANCE - PRINCIPLES

 Final objective is maximisation of wealth,

one need to create wealth to distribute it
 Cost not born directly by somebody has to
be born by him indirectly or directly and
indirectly by somebody else.
 Best instrument of cost mitigation or
recovery is pricing (user charges) but it is
fundamentally regressive as consumption is
not good indicator of income
FINANCE - CLASSIFICATION

Finance

Private Finance Public Finance

Personal Corporate / National Sub -

Finance Institutional Finance National
Finance Finance
MUNICIPAL FINANCE - INTRODUCTION

Deals with finances of all types of the

urban local governmental bodies
Raising and disbursement of public
funds.
Investment Decision - comparing returns
and opportunity cost of various options
Financing Decision-Providing and procuring
funds in best possible manners.
Dividend Decision – maximisation of returns
– maximisation of wealth of society
 MUNICIPAL FINANCE - INTRODUCTION

 Municipal (Public) Finance deals with the

following -
 Financial operations and policies of the fisc -
the state treasury.
 Extent of State intervention.

 Scope of public sector economy

 Size of Public Revenue.

 Raising of the taxes.

 MUNICIPAL (PUBLIC) FINANCE - INTRODUCTION

 Characteristics of the tax system.

 Distribution of tax burden.

 Realisation of equity aspect.

 Formal and effective incidence of taxation on

production, consumption, distribution and
welfare.
 Pattern of growth and public expenditure.
 MUNICIPAL (PUBLIC) FINANCE - INTRODUCTION

 Incurring Public Expenditure - ways.

 Criterion for budget, balancing of budget.

 Extent of Public Borrowing, debt manage.

 Deficit financing, its limit/extent.

 Public Finance should not be confused with

public economics.
MUNICIPAL (PUBLIC) FINANCE - INTRODUCTION

 Municipal (Public) Finance is a systematic

analytical study of economic behaviour of State
as a relationship between
 multiple social wants
 scarce productive resources
 having alternative uses
 attainment of general well-being.
 MUNICIPAL (PUBLIC) FINANCE - INTRODUCTION

Subject matter of Municipal (Public) Finance

 Public Revenue - methods of raising funds and
principles of taxation.
 Public Expenditure - Allocation of resource.

 Public Debt - causes and methods of borrowing.

 Financial Administration - organisation and

working of financial machinery.
 MUNICIPAL (PUBLIC) FINANCE - INTRODUCTION

Scope of Municipal (Public) Finance -

 The Allocation Function
 The Distribution Function

 The Stabilization Function

 The Growth Function

MUNICIPAL FINANCE - PRINCIPLES

 In
modern context urban local government is also
an economic unit like a firm or household
Needs to be driven by objectives
Rational Behaviour

Economizing

Needs to earn, borrow and spend to achieve

objectives
 But being in existence for ‘people’, it has socio-
political and welfare dimensions beside
efficiency
Transparency, Contestability, Accountability & Equity
MUNICIPAL FINANCE - PRINCIPLES

 To sum up –
 Municipal finance first need to adhere to
core principles of ‘finance’
 Secondly it needs to exists for public
interest
 Maximisation of aggregate public interest
through maximisation of returns on public
resources is the next frontier
 Equitable distribution of returns/wealth is
the final objective of municipal finance
MUNICIPAL FINANCE - PRINCIPLES
 The first rule of municipal finance is
wherever possible, charge – recover cost
 Property tax constitutes a suitable tax
from which to finance the provision of
pure, local public goods
 Services such as water, garbage
collection, public library and public
recreation should be subjected to
pricing.
 Failure to use a proper pricing system
suggest that goals other than efficiency
dominate local decision making.
 Thank You
PRINCIPLES OF MUNICIPAL FINANCE