Government Finance (Public Finance)
Government finance is the branch of economics which studies the income and expenditure of public authorities. It is also known as public finance.
Components of Government Finance
- Public revenue
- Public expenditure
- Public debt (borrowing)
- Public budget
Importance of Government Finance
- Efficient allocation of resources
- Maintenance of economic stability
- Provision of social goods and infrastructure
- Capital formation
- Redistribution of income and wealth
- Efficient mobilization of resources
- Promotion of economic development
- Correction of balance of payments
Government Expenditure
Government expenditure refers to the nature and amount of spending incurred by public authorities at central, provincial, and local levels.
Importance of Government Expenditure
- Maintenance of law and order
- Investment in social and economic overheads
- Utilization of natural resources
- Development of agriculture and industry
- Provision of subsidies and grants
- Provision of administrative services
- Balanced regional growth
- Other welfare and contingency expenses
Classification of Government Expenditure (Reference: Nepal)
Recurrent Expenditure:
- Constitutional organs
- General administration
- Revenue administration
- Economic administration and planning
- Judicial administration
- Foreign services
- Defense
- Social services
- Economic services
- Loans and investment
- Miscellaneous
Capital Expenditure:
- Constitutional organs
- General administration
- Economic administration and planning
- Social services
- Economic services
- Miscellaneous
Concept of Tax
A tax is a compulsory monetary charge imposed by the government on individuals and institutions to finance public expenditure without direct quid pro quo.
Types of Taxes
Direct Tax
If the impact and incidence of a tax fall on the same person, it is called a direct tax.
Features of Direct Taxes
- Burden of tax cannot be shifted
- Certainty
- Elastic
- Productive
- Educative
- Anti-inflationary
Merits of Direct Taxes
- Ensures equity or equality
- Economical
- Certain
- Elastic
- Productive
- Progressive in nature
Demerits of Direct Taxes
- Inconvenient
- Disincentive to work and saving
- Possibility of tax evasion
- Arbitrary in nature
- Limited scope
Indirect Tax
When the impact of tax falls on one person and the incidence is shifted to another, it is called an indirect tax.
Features of Indirect Taxes
- Shifting of tax burden
- Broad-based
- Difficult to evade
- Convenient
- Inflationary
- Uncertain
Merits of Indirect Taxes
- Convenient
- Broad-based
- Non-evadable
- Equitable distribution of income
- Check harmful consumption
- Elastic
Demerits of Indirect Taxes
- Regressive
- Uncertain
- Uneconomical
- Unproductive
- Harmful to industries
- Un-educative
Proportional, Progressive, Regressive, and Digressive Tax
- Proportional Tax: Tax rate remains the same at all income levels.
- Progressive Tax: Tax rate increases with increase in income and wealth.
- Regressive Tax: Tax rate decreases as income increases.
- Digressive Tax: Tax rate increases with income, but at a slower rate than the increase in income.
Qualities of a Good Tax System (Canons of Taxation)
- Canon of equality
- Canon of certainty
- Canon of convenience
- Canon of economy
- Canon of productivity
- Canon of elasticity
- Canon of simplicity
- Canon of diversity
- Canon of uniformity
Government Revenue
Government revenue refers to the income earned by the government from various sources.
Sources of Government Revenue
Tax Revenue:
- Customs
- Tax on consumption and production of goods and services
- Land revenue and registration
- Tax on property, profit, and income
Non-Tax Revenue:
- Gifts and grants
- Fees
- Fines and penalties
- Property without successor (Escheat)
- Special assessment or betterment levy
- Income from public properties and enterprises
- Foreign grants
Government Borrowing (Public Debt)
Government borrowing refers to funds raised by the government through internal and external loans.
Importance of Government Borrowing
- Implementation of development plans
- Meeting budget deficit
- Meeting war expenses
- Controlling economic depression
- Controlling inflation
Sources of Government Borrowing
- Internal borrowing
- Market borrowing
- Non-market borrowing
- External borrowing
- Bilateral borrowing
- Multilateral borrowing
Government Budget
A government budget is a statement of estimated income and expenditure of the government for a fiscal year, submitted to the legislature for approval.
Types of Budget
- Deficit budget
- Surplus budget
- Balanced budget
Process / Steps of Budget Formulation in Nepal
- Estimation of overall expenditure
- Priority establishment
- Project preparation
- Selection of projects and submission
- Preparation of final budget
- Authorization and execution