How government is managing finance to meet the need of country

1. -BY:
PROF. RUCHA THADESHWAR
SPKM EDUCATIONAL CAMPUS,
JETPUR

2. Public Finance
 “ The task of economic stabilization requires
keeping the economy from straying too far
above or below the path of steady high
employment.
 One way lies inflation, and the other lies
recession. Flexible and vigilant fiscal and
monetary policy will allow us to hold the
narrow middle course.”
 Public finance is a study of income and
expenditure of the government at the central,
state, and local levels.

3. The Concept Of Public Finance
 Government has to perform certain functions in a
country such as to supply certain public or
collective goods which individuals cannot or do
not singly perform. And this is the responsibility
of the government to provide those goods for
which it needs revenue.
 In the narrow sense, public finance is defined
only as the study of income and expenditure of
the government.

5. Introduction
 Fiscal policy is the means by which a
government adjusts its spending levels and tax
rates to monitor and influence a nation's
economy.
 It is the sister strategy to
monetary policy through
which a central bank
influences a nation's money supply.
 These two policies are used in various
combinations to direct a country's economic

6. What is fiscal policy?
 Fiscal policy involves the use of government
spending, taxation and borrowing to affect the
level and growth of aggregate demand, output
and jobs.
 Fiscal policy is also used to change the pattern
of spending on goods and services.
 It is also a means by which a redistribution of
income & wealth can be achieved for example
by changing tax rates on different levels of
income or wealth

7.  Government typically use fiscal policy to promote
strong and sustainable growth and reduce
poverty
 “ A policy that uses public finance as balancing
factor in development of economy is called fiscal
policy.”
-J.M.Keynes
Tools of Fiscal Policy:
Public revenue
Public Expenditure
Public Debt

8. Objectives
of fiscal
policy
To increase
the process of
capital
formation
To increase
national
income
Controlling
inflation
Equal
distribution of
income
Removal of
unemployment
Reduction of
regional
disparities
To improve
balance of
payment.

9. 1. To increase the process of
capital formation
 A newly developing economy is encompassed
by a ‘vicious circle of poverty’.
 Therefore, a balanced growth is needed to
breakdown the vicious circle which is only
feasible with higher rate of capital formation
 Prof. Raja J. Chelliah recommends that fiscal
policy must aim at the following for attaining
rapid economic growth:

10. Steps for capital formation
Raising the
ratio of saving
to Income by
controlling
consumption ;
Raising the
rate of
investment:
Encouraging
the flow of
spending into
productive
way;
Reducing
glaring
inequalities of
income and
wealth.

11. 2.To increase national income
 fiscal policy in a developing economy, should aim at
achieving an accelerated rate of economic growth.
 But a high rate of economic growth cannot be
achieved and maintained without stability in the
economy.
 Therefore, fiscal measures such as taxation, public
borrowing and deficit financing etc. should be used
properly so that production, consumption and
distribution may not adversely affect.
 It should promote the economy as a whole which in
turn helps to raise national income and per capita
income.

12. Steps for increasing national
income
Capital
formation
Inspire
investment in
the industries
useful for
economic
development
Tax rebates
and
concessions
to private
enterprenuer
s

13. 3.Controlling inflation (economic
stability)
 International cyclical fluctuations cause
variations in terms of trade, making the most
favourable to the developed and unfavorable
to the developing economies.
 So, for the purpose of bringing economic
stability, fiscal methods should incorporate
built-in-flexibility .
 The instability caused by external forces is
corrected by a policy, popularly known as ‘tariff
policy’ rather than aggregative fiscal policy.

14. Steps foe economic stability
In inflation heavy duty
should be imposed on
export and import.
Increase in direct taxes
and indirect taxes.
In recession, tax rates
should be decreased and
deficit financing should
be used.

15. 4.Equal distribution of income
 Inequality in wealth persists in such countries
as in the early stages of growth, it
concentrates in few hands.
 It is also because private ownership dominates
the entire structure of the economy.
 Besides, extreme inequalities create political
and social discontentment which further
generate economic instability.
 For this, suitable fiscal policy of the
government can be devised to bridge the gap
between the incomes of the different sections
of the society.

16. steps
• Higher taxes
Rich
class
• tax rebates and
concession
Poor
class-

17. 5.Removal of unemployment
 In developing countries, even if full
employment is not achieved, the main motto is
to avoid unemployment and to achieve a state
of near full employment.
 To reduce unemployment and under-
employment, the state should spend
sufficiently on social and economic overheads.
 These expenditures would help to create more
employment opportunities and increase the
productive efficiency of the economy.

18. steps
 A properly planned investment will not only
expand income, output and employment but will
also step up effective demand through multiplier
process and the economy will march
automatically towards full employment. Besides
public investment, private investment can also be
encouraged through tax holidays, concessions,
cheap loans, subsidies etc.

19. 6.Reduction of regional
disparities
 In concentrated regions, higher tax rates are
charged.
 In the rural areas attempts can be made to
encourage domestic industries by providing
them training, cheap finance, equipment and
marketing facilities. Expenditure on all these
measures will help in eradicating
unemployment and under-employment

20. 7.To improve the balance of
payment
 If a developing country wants economic growth,
it should attain industrialization, imports of
machinery and technical knowledge.
 In this way the import goes up and the raw
material that were exported till now are utilized
in domestic industries. So export will reduce
resulting into deficit balance of payment.
 To cure the problem govt. should increase import
duty and export should be promoted by tax
exemption and subsidies.

22. Public revenue
 it includes only
those sources of
income of the
government which
are described as
revenue resources.
These sources are
not subject to
repayment. Eg:- tax,
fee, fines etc.
 it includes all the
income and receipts
of the government
irrespective of their
sources. Eg:- loans
raised by the
government which is
to be repaid.
Narrow sense Broader sense

23. Public
revenue
Non tax
revenue
Profit from
state
enterprises
Gifts and
grants
Foreign
domestic
administrative
revenue
Fees
Fines and
penalties
Special
assesment.
Tax revenue
Direct tax
Indirect tax

24. Public expenditure
 Public Expenditure is the end and aim of the
collection of State revenues.
 It involves the judicious expenditure of public
funds on the most important and socially and
economically relevant activities of the State.
 The term ‘Public Expenditure’ refers to the
expenses incurred by the Government for its own
maintenance and also for the preservation and
welfare of society and economy as a whole.
 It refers to the expenses of the public authorities,
Central, State and Local Governments, for
protecting the citizens and for promoting their
economic and social welfare.

26. Effect of public expenditure on
economy
 An increase in Public Expenditure raises the
level of GNP.
 Public expenditure increases the purchase of
goods and services
 Increases household incomes
 Increases Govt Indirect tax revenues
 Increase the flow of funds in the economy
 Increases private Income and thereby the
Private Expenditure

27. Public debt
 Public debt is the money that a government or a
government branch owes other entities at any
given time. It is composed of different categories
of debt: internal &external. Most of the public
debts are external debts.

28. Effect of internal public debt
In inflation
government
increases public
debt
In recession
government
releases public
debt

29. Effect of external debt
 In external public debt country’s purchasing
power reduces,
 That will affect demand, production and
income. As a result economic growth becomes
slow.
 It may happen that some industrial unit may
shut down and new industries might set up.

30. Deficit financing
 Deficit financing is a method of meeting
government deficits through the creation of
new money.
 The deficit is the gap caused by the excess of
government expenditure over its receipts.
 The expenditure includes disbursement on
revenue as well as on capital account.
 The receipts similarly comprise revenues on
current account as well as capital account.
Creation of new money to meet the deficit in
use for a long time.

31. Why we need deficit financing?
 For developing countries like India, higher
economic growth is a priority. A higher economic
growth requires finances.
 With the private sector being shy of making huge
expenditure, the responsibility of drawing financial
resources rests on the government.
Often both the tax and non-tax revenues fail to
mobilize enough resources just through taxes.
The deficit is often funded through borrowings or
printing new currency notes.

32. Pitfalls of deficit financing
 Printing new currency notes increases the flow of
money in the economy.
 This leads to increase in inflationary pressures which
leads to rise of prices of goods and services in the
country.
 Deficit financing is inherently inflationary. Since deficit
financing raises aggregate expenditure and, hence,
increases aggregate demand, the danger of inflation
looms large.
 Retail inflation in India already shot up to a five-and-a-
half-year high of 7.35% in December, breaching the
central bank’s tolerance limit of 6% and confirming
fears raised by some economists that India is entering
a phase of slow growth and rising prices.

33. What are the effects on
investment?
 Deficit financing effects investment adversely.
 When there is inflation in the economy
employees demand higher wages to survive.
 If their demands are accepted it increases the
cost of production which de-motivates the
investors.

34. Surplus budget to control
inflation
 In inflation the level of demand increases
against the level of supply.
Public
revenue
should
increase.
Public
expenditure
should
reduce
Public debt
should
increase
Deficit
financing
should not
use

35. Deficit budget to control
recession
 During recessive period, demand falls against
supply.
Public
revenue
should
reduce.
Public
expenditure
should
increase
Public debt
should
reduce
Deficit
financing
should use