TOPIC 2

PUBLIC FINANCE

Lecturer: Tran Huu Tuyen

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 CONTENTS

1. Overview of public
finance

2. Government revenue/State budge

revenue

3. Government expenditure/ State budge

expenditure

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1. OVERVIEW OF PUBLIC FINANCE

Definition

Features

Classifications

Functions
 1.1. DEFINITION

• Public finance is the study of income and expenditure of the

government at the central, state, and local levels.
Definition • Public finance is the study of the role of the government in the
economy. (Gruber, 2015)
 1.1. DEFINITION
PUBLIC GOODS
• A public good refers to a commodity or service that is made available to all
members of a society. Typically, these services are administered by governments
and paid for collectively through taxation.
• Pure public goods are goods that are perfectly non-rival in consumption and are
non-excludable.
• Pure public goods are characterized by two traits:
o non-rival in consumption One individual’s consumption of a good does not
affect another’s opportunity to consume the good.
o non-excludable Individuals cannot deny each other the opportunity to
consume a good.
 1.1. DEFINITION
TWO QUESTIONS OF PUBLIC FINANCE

Why should the government

intervene in the economy?

How might the government

intervene?

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 1.1. DEFINITION
Why should the government intervene in
the economy?

• A problem that • The shifting of

causes the market resources from
economy to deliver some groups in
an outcome that society to others.
does not maximize
efficiency.

Market Failures Redistribution

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 1.1. DEFINITION
How might the government intervene?
There are several different general approaches that the government can take to
intervention:

Tax or Subsidize Private Sale or Purchase

Restrict or Mandate Private Sale or Purchase

Public Provision

Public Financing of Private Provision

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 1.2. FEATURES

• Associated with state

Ownership
ownership

Benefits • Social benefits, nonprofit

Performance • Cannot be directly evaluated

efficiency

Operation scope • Wide operation scope

 1.3. CLASSIFICATION

By operation and management:

Public
finance

Public Public
Revenues Expenditures Public Debts
 1.3. FUNCTIONS

1 2

• Ensure the • Macro-regulation of

existence and socio-economic and
operation of the market activities
government
 1.3. FUNCTIONS
Ensure the existence and operation of the government

Taxation
(Mandatory)
Public Meets the
needs of

financial government
expenditures

funds
Non-tax

Help the government operate effectively

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 1.3. FUNCTIONS
Macro-regulation of socio-economic and market activities

Production orientation, promotion of stable and sustainable

economic growth

Revenue policies

• Diverse tax policies to orient investments, create

favorable business environment; adjust the
Economic economic structure, promote business expansion...

regulation Expenditure policies

• Spending on infrastructure construction for socio-

economic facilities
• Financial support spending for economic sectors
(subsidies, subsidize, joint ventures, human
resource training…)
 1.3. FUNCTIONS
Macro-regulation of socio-economic and market activities

Example of tax policy

Goods, services VAT Excise tax

1. Fertilizers, pesticides 5%

2. Electricity 10%

3. Water 5%

4. Beer 50%

5. Votives 70%

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 1.3. FUNCTIONS
Macro-regulation of socio-economic and market activities

Example of expenditure policy

Vietnamese key industries ? Vietnamese industries with

export advantages?
Electricity? Rice?

Mineral? Textile?

Coal? Fishing products?

Airline? Agriculture products?

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 1.3. FUNCTIONS
Macro-regulation of socio-economic and market activities

Market regulation, price stabilization, macroeconomic stability

Through tax policies

• Increase/Decrease of tax
Market
regulation Through government expenditure
policies

• Use of reserve funds, price stabilization funds

 1.3. FUNCTIONS
Macro-regulation of socio-economic and market activities

Redistribution Income

Tax policies
• Use of tax tools (direct & indirect tax) to
regulate income in the direction of: regulation
of people with high and average incomes to
narrow the gap with people with low incomes.
• High taxes for high-brand (luxury) goods,
Social services and low taxes for essential goods,
regulation services

Expenditure policies
• Subsidies
• Social security, providing jobs, poverty
reduction, targeted programs…
 DISCUSSION

¨Can subsidies for television, bus fees, etc. guarantee

the equality if the majority of the people using these
services are rich people?
¨When the price of strategic goods (rice, gasoline,
etc.) fluctuates, how does the government use
financial tools to intervene?
¨Does Vietnamese governement use public financial
policies to stabilize the market, control inflation?

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 2. PUBLIC REVENUES

2.1. Definition

2.2. Classification
 2.1. DEFINITION

This is one of the branches of public finance. It deals

with the various sources from which the state might
derive its income.
 2.2. CLASSIFICATION

Public
revenues

Tax
Revenue

Non Tax
Revenue

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 TAX REVENUE
• Definition: A tax is a compulsory financial charge or some
other type of levy imposed on a taxpayer (an individual
or legal entity) by a governmental organization in order to
fund government spending and various public expenditures

• Compulsory • Unrequited
contribution

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 TAX REVENUE

A tax levied on income earned on one’s job.

• Taxes on Earnings

A tax paid on individual income accrued during the year.

• Taxes on Individual Income

Tax levied on the earnings of corporations.

• Taxes on Corporate Income

Taxes paid on the value of the assets, such as real estate or stocks, held by a
person or family.
• Taxes on Wealth

A tax paid on individual or household consumption of goods (and sometimes

services).
• Taxes on Consumption

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 TAX REVENUE

v Classified by subject/tax base

Wealth Income
taxes taxes

Consumption
taxes
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 TAX REVENUE

v Classified by tax transfer method

TAX

Direct tax Indirect tax

 NON TAX REVENUE
Non-tax revenue is the recurring income earned by the government
from sources other than taxes. These incomes are in the form of
prices of goods and services supplied by public enterprises,
administrative revenues in the form of fees, fines, gifts and grants.

For example:

•Interest receipts
•Dividends
•Grants
•Fines

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3. PUBLIC EXPENDITURE

3.1. Definition

3.2. Classification
 3.1.DEFINITION

Public expenditure refers to money spent by the public sector

on the acquisition of goods and provision of services such as
education, healthcare, social protection, and defense.

Source: GSO
 3.2. CLASSIFICATION

Revenue
expenditures
Government
expenditures

Captial
expenditures
 3.2. CLASSIFICATION
Basic Capital Expenditure
Definition Incurred for creation of
government assets or
reduction in government
liabilities.
Nature non recurring in nature.
Focus Capital expenditure is called
developmnent expenditure.
Examples Loan granted to state
government, repayment of
loans
Revenue Expenditure
Incurred for normal running of
government departments.
They neither create assets nor
reduce the liability of the
government.
Recurring in nature and
incurred regularly
Revenue expenditures are
called non development
expenditures.
Salaries, pension, interest
payments. subsidies & grants
etc