UNIT ONE

INTRODUCTION PUBLIC FINANCE

Public Finance deals with the income and expenditure of public authorities.
It deals with the financial operations or finances of the government.
Definition of Public Finance
 Is concerned with the income and expenditure of public authorities and with the
adjustment of one to the other.” Huge Dalton
 Studies the economic activity of government unit.” Buchanan
The Similarity and Differences between Public Finance and Private Finance
Public finance relates to the money-raising and income-expenditure functions of the government.
Private finance refers to the income-expenditure phenomenon of an individual or private
business
Similarities
 Satisfaction of Human Wants
 Maximum Advantage from expenditure
 Borrowings
 Engagement in Similar Activities=Both the private and public sectors are engaged in
activities that involve lots of purchases, sales and other transactions
 Scarcity of Resources
 Problem of Adjustment of Income and Expenditure
Differences
 Motive. The motive of private finance is personal interest or benefit, whereas the motive
of public finance is social benefit or public welfare.
 Adjustment Approach of Income and Expenditure individual tries to adjust his
expenditure to his income because his expenditure depends on his income, the
government first determines its expenditure and then devises ways and means to raise the
requisite revenue
 Nature of Resources. The resources (private finance) of an individual are more or less
limited, whereas the resources of the government (public finance) are enormous
 Coercive Methods. An individual (private finance) cannot use coercive methods to raise
his income; whereas the government (public finance) can use forceful methods to collect
revenue
 Secrecy of Budget. Public finance is an open affair as the government gives utmost
publicity to its budget by publishing it in newspapers and by showing it on television . An
individual tries to keep his accounts secret
 Long/Short-term Consideration the private individuals incur expenditure in those areas
of business which give quick returns government incurs expenditure keeping in view the
long-term considerations,
  Elasticity of Finance. Public finance is elastic in nature-as compared to private finance.
Public finance can be increased by imposing various taxes as public finance is open to
drastic changes. Private finance on the other hand, cannot be increased
 Deliberation in Expenditure public expenditure is governed and controlled by
deliberate economic policy of the Government an individual is governed by habits,
customs, status, personal needs etc
 Right to Print Currency. The government has a right to print currency which is legal,
whereas private individual does not enjoy such a right.
 Audit. private finance, auditing of the financial transactions is not always necessary. But
the public authorities are subject to audit
Functions of Modern Government & Fiscal Operation
 Security
 Justice
 regulation and control of economy
 Conservation of natural resources
 Administration and financial system, government revenue expenditure and fiscal control

Government of a modern state generally undertakes the following functions:

Allocation Function
Fiscal operations of taxation and public expenditure have the effect of transferring resources
form the public that would have been used for consuming private goods to produce public goods
which would satisfy collective wants.
The objective of fiscal operations is to provide for the proper allocation of resources between
private and public goods so as to maximize social welfare
Distribution Function
to reduce the incomes and wealth of the rich (through progressive taxation) and using the money
collected to raise the income and standard of living of the lower income group (through public
expenditure}.
Stabilization Function
Fiscal operations have been used to moderate economic fluctuations
1.4. Scope of Public Finance
1. Public Revenue,
2. Public Expenditure,
3. Public Debt,
4. Financial Administration & control
5. Economic Stability & Growth.
1.4.1. Public Revenue
Public Revenue is very necessary for the government to perform its various functions
sources of public revenue are
 taxes
  income from currency
 sale of public assets
 commercial revenues,
 administrative revenues (e.g., fees, fines, penalties, forfeitures, escheats and licenses),
 grants and gifts

Sources of public revenue are categorized as:

1. tax revenue and
2. non-tax revenue.

Tax Revenue

Tax revenue is a revenue collected by tax

Taxes are compulsory payments to government without expectation of direct return or benefit to
tax payers.

elements of taxation are as follows:

a. it is a compulsory contribution
b. government only imposes taxes
c. in payment of tax an element of sacrifice is involved
d. taxation is aimed at welfare of the community
e. the benefit may not be proportional to tax paid
f. tax is a legal collection.
taxes can be listed or imposed under three heads
1. First type can be titled taxes on income and expenditure=include income tax, corporate
tax etc
2. The second is taxes on property and capital transactions=estate duty, tax on wealth, gift
tax etc.
3. The third head, called taxes on commodities and services=excise tax, customs duties,
sales tax, service tax etc

B. Non-tax Revenue

Includes the revenue from:

 government or public undertakings,

 revenue from social services like education and hospitals, and
 revenue from loans or debt service.
1.4.2. Public Expenditure
 UNIT TWO

GOVERNMENT BUDGET

 budget means, “Plans of government’s finances submitted to the legislature for

approval”.
 budget reflects what the government intends to do
 is the powerful instrument for fulfilling the basic objectives of government.
 The budget covers all the transactions of the central government.
 The budget goes into operation only after it is approved by the parliament.
 budget is an annual statement of receipts and payments of a government.

2.2. Functions of Budget

 Proper allocation of resources

 Equitable distribution of income and wealth and
 Securing economic stability and full employment
 Long-term economic growth
 To facilitate legislative control

2.3. The Concept of Budgeting in Ethiopia

The government budget represents a plan/forecast by government of its expenditures and

revenues for a specified period.

government budget is prepared for a year known as a financial year or fiscal year.

In Ethiopia the fiscal year is from July 7 of this year to July 6 (Hamle 1 - Sene 30)

Budgeting involves different tasks

1. On the side of expenditure= deals with the determination of the total amount of money needed for the year
2. on the revenue side, it involves the determination of the size of the overall revenue and foreign aid
3. budgeting also address the issue of the budget deficit

2.3.1. Budget Structures in Ethiopia

Budget structures= are the formats that organize budget data

is in addition to providing information on what the government proposed to do, the budget
structures indicate the full responsibility of the spending agency

The first classification of the budget is between

1. revenue budget and

2. Expenditure budget.

2.3.2. Revenue Budget

It represents the annual forecast of revenues to be raised by government through taxation and
other measures,

In Ethiopia, the revenue budget is usually structured into three major headings:

1. ordinary revenue,
2. external assistance, and
3. capital revenue.

the funds expected from these three sources are proclaimed as the annual revenue budget for the
country

The revenue budget is prepared by the Ministry of Finance (MoF) for the federal government
and by Finance Bureaus for regional governments.

Ordinary revenues= include both tax and not tax revenues

 tax revenues being direct taxes=income tax, rental income tax, business income tax,
agricultural income tax…..
 indirect taxes (excise tax on locally manufactured goods, sales tax on locally
manufactured goods, service sales tax, stamps and duty