Public Revenue

• Every government has two important sources of revenue.

These are:
(a) Tax sources, and
(b) Non-tax sources.
What is a Tax?
• Tax is one of the most important sources of revenue to every
government. In the earlier days, payment of taxes was
optional. A choice was given to the people to pay the tax and
to avail the benefit of social amenities in the form of
education, health and sanitation, utilities and recreation
facilities. Naturally, everyone interested in availing social
amenities used to evaluate the benefit derived by him in
exchange for the tax to be paid by him
 A tax is a compulsory levy payable by an economic unit to the
government without any corresponding entitlement to
receive a definite and direct quid pro quo from the
government.
 It is not a price paid by the tax payer for any definite service
rendered or a commodity supplied by the government. The
benefits received by taxpayers from the government are not
related to or based upon their being taxpayers.
 A tax is a generalized exaction, which may be levied on one or
more criteria upon individuals, groups of individuals, or other
legal entities.
 It may be noted that a public receipt containing an element of
compulsion does not automatically become a tax. In order to
be a tax, the absence of a quid pro quo is a must. Quid pro
quo means something given or taken as equivalent to
another.
 Non-tax revenues
The major non-tax revenue sources of a government
include the following:
Debt finance
 It is the use of borrowed funds to finance
government expenditures. Those who lend funds
to the government for the purpose of financing
government expenditures usually do so under
their own free will. In return for the funds that
they lend to the government, they receive a bond,
or some other note of government indebtedness,
that embodies the promise of the government to
repay the loan with interest at some future date.
User charges
 User charges are prices determined through
political rather than market interaction.
 These charges can finance government-supplied
goods and services only when it is possible to
exclude individuals from enjoying their benefits
unless they pay a fee.
 User charges often help to finance such
government-supplied services as highways,
bridges, and common in the U.S. and in money
other countries
 Income from currency
 Profit from paper currency and mintage are also
like compulsory levies upon the public. The actual
cost of creating this currency is much less than its
face value.
 The government, therefore, makes a profit out of
this. But this profit is not like the usual profits
from other public undertakings. The public has no
choice but to use this currency at its face value. 
 Income from currency can be also a cause for
inflation. This type of inflation is termed as
government-induced inflation
 Donations;- are voluntary contributions to
governments from individuals or
organizations. These occasionally are used to
finance particular programs.
 For example, governments might set up
special funds to finance aid to victims of
natural disasters and other individuals in
difficulty, perhaps asking citizens to send
contributions to such funds.
• Interest receipts, dividends and profits: This
section comprises, apart from interest receipts
on loans by the government to other parties,
dividends and profits from public sector
undertakings run by or as government
departments including other income
generating departments
 PUBLIC EXPENDITURE
 Public expenditure refers to the expenses
which a government incurs for
(i) its own maintenance,
(ii) the society and the economy, and
(iii) helping other countries.
 In practice, however, with expanding state
activities, it is becoming increasingly difficult
to separate the portion of public expenditure
meant for the maintenance of the government
itself from the total.
 Reasons for growing expenditure
Wagner based his hypothesis on historical facts, primarily of Germany.
A number of reasons can be enumerated for this inherent long-term
tendency recorded in history. Common causes for this inherent
increases:
 Defense
 welfare state
 Provision of other public goods

• A multitude of additional factors have caused the rising trend of

public expenditure in modern times:
– population growth
– transport and communication
– urbanisation effect
– growth of democracy
– rising trend of prices
– Cost of debt servicing and repayment of the loans
– increase in the activities of the state
– Protection of the economy from the failures of the market mechanism
– the planning and economic growth effects
– the rural development effect
– general expenditure and internal security
– others
 Classification of public expenditures
 Technically, in the structure of a budget, most governments classify
public expenditure into two:
 current expenditure, and
 capital expenditure
 All sorts of administrative and defence expenditure & debt services are
called current expenditure. They are also referred to as non-
developmental expenditure. They are intended for continuing the
existing flow of goods and services and maintaining the capital of the
country intact. 
 On the other hand, capital expenditure contributes to increased
productive capacity of the nation and therefore, is known as
development expenditure. Expenditures on construction of dams, public
works, state enterprises, agricultural and industrial development, etc.,
are instances of capital expenditure. 
 Though public expenditure is a means of maintaining the capital of the
county intact, it is not merely a financial mechanism, it is rather a means
of securing social objectives. 
 Productive and unproductive expenditures
 This distinction emphasizes that while some expenditures are in
the nature of consumption, others are in the nature of
investment and help the economy in improving its productive
capacity.
 Under the laissez-faire philosophy, the only productive public
expenditures are those which are incurred to create and
maintain social overheads.
 Expenditures on administration, defense, justice, law and order,
and maintenance of the state are unproductive.
 Adam smith believed that an economy added to its productive
capacity in the long-run only through additions to its capital
stock and production of tangible goods.
 It is obvious that the foregoing analytical framework is totally
unrealistic for various reasons.
Transfer and non-transfer expenditures
 A transfer expenditure is a payment without
corresponding receipt of goods and services by the state.
 Examples are interest payments, old-age pensions and
unemployment benefits.
 In this cases, the gov’t is simply transferring the right or
claim to use the goods & services to certain sections of
the society.
 In contrast, non-transfer expenditure is that by which the
state pays for its purchases or use of goods & services.
 While in the case of transfer expenditure, the
beneficiaries are to decide about the use of real
resources, in the case of non-transfer expenditure, it is
the state which uses the resources straight away.
 Public Debt
• Public debt refers to all obligations of the government to various sources or
creditors. It is a debt or loan taken by the government from its own people,
organizations as well as from foreign countries or both.  

• As mentioned in the “Encyclopaedia Britannica”, public debt refers to

“obligations of governments, particularly those evidenced by securities to
pay certain sums to the holders at some future date.”
•  
• Government needs to borrow when current revenue falls short of public
expenditure since current public revenue is usually insufficient to meet the
current and development expenditure of the modern government, the
government has no alternative except to borrow money. 

• The instruments of public borrowings are in the form of various types of

government bonds and securities. A government bond or a government
security paper is a form of a written promise to pay, made by the
government to the lender of the capital.
• 4. Financial Administration
• This category includes the preparation of financial budget, the control and
administrations of the budget relevant problems auditing etc. The term budget
includes ‘Annual Financial Statements’ which incorporates all the annual
statements of receipts and expenditures of the government.

• 5. Economic Stabilization
• Generally under developed countries have the following features.
• 1. Predominantly agriculture based economy
• 2. Low capital formation
• 3. Inferior technical know how
• 4. Low per capita income
• 5. Over population and poor health and educational facilities.
• 6. High propensity to consume leading to low capital formation.

• This category analyses the use of public finance to bring the economic stability in
the country. It studies the use of financial policies of the Government from the
view of economic development.
 Fiscal policy
• Fiscal policy is also called as budgetary policy. In
broad terms, fiscal policy refers to that segment of
national economic policy, which is primarily
concerned with the receipts, and expenditures of
these receipts and expenditures.
• It follows that fiscal policy relate to those activities
of the state that are concerned with raising financial
resources and spending them.
• In general, Fiscal policy relates to the governments
decision making with respect to the following:
1.Taxation 2.Government spending 3.government
borrowing and 4.management of government debt.
 Role of Fiscal Policy in the Economic Development
– In under developed and developing countries
development is the main concern. The primary task
of fiscal policy in an under developed and
developing countries is to allocate more resources
for investment and to restrain consumption.
– The fiscal policy should reduce the economic
inequalities of income and wealth. This can be
achieved by taxation and public distribution
measures. Poverty and unity cannot co exist.
Therefore fiscal policy should attempt economic
development of the socially unfortunate to bring
about national unity.
– In under developed and developing countries the
requirement of growth demands that fiscal policy
has to be used progressively for raising the level of
investments and savings rather than keeping the
consumption level.
– The existing pattern of investment may differ from
the optimum pattern of investment. Thus it
becomes a responsibility of government to
undertake investments in such a way that it is most
beneficial for the people of the country through its
fiscal policy.
• Fiscal policy should control inflation within tolerable
levels since inflation mostly affects the poor. In under
developed and developing countries there exist
regional imbalances in addition to social inequalities.
Fiscal policy should aim at reducing both regional and
social imbalances by directing investments to less
developed regions.