Public Finance

Public finance is the approach to managing the public funds in the country’s economy that plays
the most important role in the development and growth of the nation, both domestically and
internationally. It also affects every stakeholder of the country, whether a citizen or not. The public
finance economics accounts for the government revenue and expenditure and the assessment of
desired outcomes is calculated accordingly.

The management of this aspect of finance is to fulfill the fundamental responsibilities of the
government towards their citizens such as food, education, shelter, health, and infrastructure.
However, it is vital to understand that according to principle, these expenditures are supposed to
be managed from the government’s income through taxation.

Public Finance Explained

Public finance is the way of managing public funds. However, it is limited to administering public
funds and other things like price stability, economic growth, income inequality, unemployment,
human rights, etc. Management of public finance is the wider term. It requires proper planning,
allocation of resources, and controlling the unfavorable situations, etc., by making the financial
and fiscal policies, budgets, etc., to ensure the nation’s growth.
Every country needs money to run. The country’s revenue is the collection of various taxes and
returns on the investment, and the government expended from the collection of the revenue. Some
expenditures are healthcare, medical facilities, salaries to the staff, members, etc. All
the revenue and expenditure are collected by or for the public. Hence, finance is called public
finance, where the role of the people is large in terms of contribution. It deals with the revenue and
expenditure at every stage the public is involved, whether at the state or central levels. Public
finance theory plays an important role in developing the economy as its growth largely depends
on its proper utilization.

Objectives
Let us understand the objectives of the public finance economics which is highly regarded and one
of the highest forms of assessing the performance of a government or its tenure within an economy.
Understanding the basis for such a theory to govern the funds collected from the citizens of the
country would help us put things relating to the government and its management into perspective.

#1 – Managing Public Needs

The main objective is managing the basic needs of the public like food, shelter, health,
infrastructure, and education. All these are the government’s responsibilities so that the
fundamental public needs are fulfilled and contribute to the development of the economy.
#2 – Economic Development
Proper management leads to economic development that leads to the nation’s growth.
#3 – Removes Inequality
It also aims at removing the inequality by proper allocation of resources, i.e., providing relief to
the poor by collecting taxes from the rich class people.
#4 – Maintaining Price Stability
It helps control inflation by various packages and means for its development.
Some objective other than the ones mentioned above could be:

1. Fulfilling the basic needs of the nation.

2. Generating employment.
3. Maintaining the currency value in the international market.

Types
The public finance theory comprises of a series of inflows and outflows that comprise to become
the body of work it turns out to be for the government and its citizens. Let us understand its types
through the explanation below.

#1 – Public Revenue
Public revenue collects money from the public through direct and indirect taxes, penalties, fines,
fees, maintenance, etc.
#2 – Public Expenditure
Public expenditure is the expenditure for the public like infrastructural facilities, basic health
facilities, medical and educational facilities, etc.
#3 – Public Debt
When the expenditure exceeds the revenue, the government can take the help of debt to fulfill the
country’s needs and run the economy.
#4 – Financial Administration
Financial administration is managing the public finance and addressing the needs of the
government like salaries to the general electives, expenditure on maintenance of communal
heritage, etc.

Components
Let us understand the components of the public finance economics through the discussion below.
#1 – Collection of Revenue
The primary and utmost important component is the collection of the revenue by taxes, fines,
charges, import duty, fees, etc., to run the economy.
#2 – Public Expenditure
Expenditure involves public expenditure and government expenditure. Public expenditure includes
the infrastructure and other expenses necessary to run the government, like salaries.
#3 – Preparation of Budgets
The budget is the annual forecast of the revenue and expenditures to analyze the need for the debtor
to invest in the finance.
#4 – Analyzing the need for Debt or Investment
The important component of public finance is to analyze whether there will be a shortage of funds
or availability of excess funds and accordingly deploy the funds.

Functions
Through the collection and payments of funds collected from the public, the public finance
theory has a series of responsibilities and functions that must be fulfilled, both in the fundamental
sense and for a larger purpose.

• Management of income and expenditure by optimum utilization of the resources.

• Managing the growth and price stability in the economy.
• Providing the necessary needs and infrastructure to the public.
• Take initiatives for the development of the people, which can contribute to the nation’s
development.
• Maintaining the transparency of the policies and the records of income and expenditures.
• Compare the actual position with the budgets and accordingly alter the policies and manage
the economy.
• Monitor the functioning and effectiveness of the financial policy.
• Preparing the economic policies for the nation’s development and the economy.
Scope
The scope of public finance economics is not limited to managing the finance. It also focuses on
maintaining the proper infrastructure, contributing to the national economy, reducing
unemployment, managing the financial pillars of the economy, operating the hygiene and
cleanness in the nation, analyses tax collection, ensuring the burden of tax is not very high,
monitoring and enforcing the implementation of the financial and fiscal policy, maintaining the
confidence of the public at large, etc.
Management
Managing public finance economics is a specialized job of a team of experts and professionals
who not only concentrate on spending the amount collected towards public welfare but also
concentrate on the collection of funds from every individual and organization under different tax
slabs. Let us understand the management of this pivotal function of a government through the
explanation below.
#1 – Management of Income and Expenditure
Public finance largely involves public money; hence management and transparency in the records
play the most important role.
#2 – Managing Debt and Investments
The role of government is wide as it manages various aspects like managing and repayment of the
timely debt, managing the assets, and the investment by the government to decide the value of
holding and benefit from it.

Importance
Let us understand the importance of implementing the public finance theory to an extend where
the economy and its citizens thrive simultaneously. This will help us understand the intricate
details of the concept.

• The proper management of public finance ensures the growth of the nation.
• It encourages investment through various policies and packages.
• Preparation, implementation, evolving with the change in technology and the policies
framed by the government for the development of the economy at large.
• It helps to maintain price stability and reduce inflation and unemployment.
• It is also important in terms of allocating natural and human resources.

Frequently Asked Questions (FAQs)

What is the role of public finance?
The role of public finance is that it verifies the government revenue and expenditure of the public
authorities and makes the arrangement of one or the other to obtain stunning results and avert
undesirable outcomes.
What are the branches of the public finance sector?
The public finance sector has four branches: public expenditure, public revenue, public debt, and
financial administration. Under public expenditure, one may know the many principles, effects,
and expenditure complexities created by the public authorities.
What are the externalities in public finance?
The externalities in public finance possess fundamental economic policy problems if households,
firms, and individuals do not incorporate the costs or the advantages received from the financial
trade.
What is the budget in public finance?
Budgeting in public finance refers to allotting measurable resources to the organization’s classified
needs. In the case of government bodies, the budget shows the statutory control to spend the funds.

KEY TAKE AWAYS:

• Public finance is the method to manage the public funds in the nation’s economy. It plays
a vital role in the nation’s growth and development, domestically and internationally. It
influences the nation’s citizen and non-citizen stakeholders.
• The objectives of public finance are managing public funds, economic development,
eliminating inequality, retaining price stability, satisfying the nation’s fundamental needs,
and managing the currency value in the international market.
• The components of public finance are revenue collection, budget preparation, public
expenditure, and assessing the debt or investment need.
• Public finance management is a broader concept. It requires appropriate planning, resource
allocation, and regulating adverse situations through creating fiscal and financial policies
and budgets to ensure the nation’s growth.
References:
https://www.wallstreetmojo.com/public-finance/
Article by Ashish Kumar Srivastav
Reviewed by Dheeraj Vaidya, CFA, FRM
Here are five objectives related to the subject of Public Finance:

1. Understand the Fundamentals: Gain a comprehensive understanding of the basic principles

and concepts of public finance, including government revenue, expenditure, taxation, and
fiscal policies.

Gaining a comprehensive understanding of the basic principles and concepts of public finance,
including government revenue, expenditure, taxation, and fiscal policies in the Philippine context
is essential for anyone interested in economics, public policy, or government administration. This
knowledge provides the foundation for effective fiscal management and policymaking in the
country. Here's a discussion of these principles and concepts within the context of the Philippines:

1. Government Revenue in the Philippines:

o In the Philippines, government revenue primarily consists of taxes, non-tax
revenues, and grants from international organizations. Taxes include income tax,
value-added tax (VAT), excise taxes, and others. Non-tax revenues encompass fees,
fines, and charges collected by government agencies.
o The Bureau of Internal Revenue (BIR) and the Bureau of Customs (BOC) are the
two main revenue-collecting agencies responsible for tax collection and customs
duties, respectively.
o Understanding government revenue is crucial because it determines the funds
available for public spending, infrastructure projects, and social programs.
2. Government Expenditure in the Philippines:
o Government expenditure in the Philippines covers a wide range of areas, including
education, healthcare, public infrastructure, defense, social welfare, and debt
servicing.
o The national budget, prepared by the Department of Budget and Management
(DBM) and approved by Congress, allocates funds to various government agencies
and programs.
o Public spending is a tool for addressing social and economic challenges, such as
poverty reduction, infrastructure development, and regional development
disparities.
3. Taxation and Fiscal Policies:
o Taxation is a critical aspect of public finance in the Philippines. It serves as a
primary source of government revenue and is used to regulate economic activities,
encourage investment, and achieve equity in income distribution.
o Fiscal policies, including taxation and government spending, are employed to
influence the overall economic environment. For instance, during economic
downturns, the government may increase spending to stimulate economic activity
and create jobs.
o Tax reforms and adjustments to fiscal policies are regularly debated and
implemented to address changing economic conditions and social needs.
4. Fiscal Challenges and Objectives in the Philippines:
o The Philippines faces unique fiscal challenges, including the need to increase
revenue collection to fund development projects and reduce income inequality.
 o Fiscal objectives are tailored to address these challenges. For example, the
government aims to promote economic growth, reduce poverty, maintain price
stability, and achieve fiscal discipline.
o Achieving these objectives often involves a delicate balance between enhancing
revenue collection, controlling expenditures, and implementing targeted social
programs.
5. Fiscal Responsibility and Transparency:
o Fiscal responsibility and transparency are critical in the Philippine context.
Institutions like the Commission on Audit (COA) play a significant role in ensuring
that public funds are used efficiently and ethically.
o Transparency in government financial management builds public trust and allows
citizens to monitor how their tax pesos are spent.

In conclusion, gaining a comprehensive understanding of public finance principles and concepts

within the Philippine context is essential for informed decision-making and effective governance.
It empowers policymakers, economists, and citizens to participate in discussions about fiscal
policies, revenue generation, and public spending that directly impact the country's economic
development and the well-being of its people.

2. Analyze Fiscal Policies: Examine the role of fiscal policies in influencing economic
conditions, such as inflation, unemployment, and economic growth, and assess their impact
on society.

Analyzing fiscal policies and understanding their role in influencing economic conditions such as
inflation, unemployment, and economic growth is crucial in the Philippine context. Fiscal policies
are a powerful tool that the Philippine government uses to manage its economy, and their impact
has significant implications for the well-being of Filipino citizens. Here's a discussion of fiscal
policies and their effects on the Philippines:

1. Economic Growth:

• Fiscal policies can be used to stimulate economic growth in the Philippines. For example,
during periods of economic slowdown, the government may increase public spending on
infrastructure projects, which not only creates jobs but also boosts economic activity.
• Investments in sectors like agriculture, manufacturing, and services can also be encouraged
through fiscal incentives and support. A thriving business environment can contribute to
sustainable economic growth.

2. Unemployment:

• High unemployment rates have been a persistent challenge in the Philippines. Fiscal
policies can be designed to address this issue by promoting job creation.
• The government can implement labor-intensive projects, such as infrastructure
development, that generate employment opportunities for the labor force. Training and
skills development programs can also enhance the employability of Filipinos.
3. Inflation:

• Controlling inflation is another critical aspect of fiscal policy in the Philippines. High
inflation can erode the purchasing power of citizens and disrupt economic stability.
• Fiscal policies can influence inflation through taxation and public spending decisions. For
instance, reducing taxes on basic necessities can help mitigate the impact of rising prices
on low-income households.

4. Income Distribution:

• Fiscal policies can play a role in addressing income inequality in the Philippines.
Progressive taxation, where higher-income individuals pay a higher percentage of their
income in taxes, can help redistribute wealth.
• Social programs, funded through government spending, can provide targeted support to the
poorest segments of the population, reducing disparities in income and living standards.

5. Fiscal Discipline and Debt Management:

• Achieving fiscal discipline is essential to maintaining fiscal sustainability. Irresponsible

fiscal policies, such as excessive government borrowing, can lead to debt crises.
• Effective debt management, including responsible borrowing and debt repayment, is
crucial to ensuring that government debt remains manageable and does not burden future
generations.

6. Public Investment:

• Fiscal policies guide public investment decisions, and the allocation of resources to sectors
like education, healthcare, and infrastructure can significantly impact the quality of life in
the Philippines.
• Strategic investments can improve the overall competitiveness of the country, attract
foreign investment, and create an environment conducive to economic development.

In the Philippine context, fiscal policies are not only tools for economic management but also
instruments for achieving broader societal objectives, such as poverty reduction and social
development. It's important for policymakers to consider the multifaceted effects of fiscal policies
and strike a balance between short-term economic goals and long-term sustainability, all while
ensuring that the benefits are distributed equitably among the Filipino population.
 3. Evaluate Budgetary Processes: Explore the processes involved in creating, implementing,
and monitoring government budgets and assess their importance in allocating resources
efficiently.

Evaluate Budgetary Processes in the Philippine Context:

Exploring the budgetary processes in the Philippines, which involve the creation, implementation,
and monitoring of government budgets, is essential for understanding how public funds are
managed and allocated efficiently in the country. These processes play a crucial role in determining
the priorities of the government and ensuring that resources are used effectively for the benefit of
the Filipino people. Here's a discussion of these processes within the Philippine context:

1. Creation of Government Budgets:

• The creation of the government budget in the Philippines is a comprehensive and intricate
process. It typically begins with the executive branch, primarily the Department of Budget
and Management (DBM), responsible for preparing the national budget proposal.
• The DBM coordinates with various government agencies to collect budgetary requests,
which are then reviewed and consolidated. This process involves negotiations, assessments
of program effectiveness, and considerations of fiscal sustainability.
• The proposed budget is submitted to Congress for approval. The legislative branch,
particularly the House of Representatives and the Senate, reviews, debates, and may make
amendments to the budget.

2. Implementation of the Budget:

• Once the budget is approved by Congress, it goes through the implementation phase.
Government agencies and departments receive allocations based on the approved budget.
• Implementation involves the execution of various programs and projects. Government
agencies must adhere to specific guidelines and regulations to ensure that funds are used
efficiently and in line with the intended purposes.
• Monitoring mechanisms are in place to track the progress of budget execution and ensure
that funds are spent as planned. The Commission on Audit (COA) plays a critical role in
auditing and overseeing government expenditures to promote transparency and
accountability.

3. Monitoring and Accountability:

• The monitoring phase is crucial for assessing the effectiveness and efficiency of
government programs and projects. This phase involves regular reporting, evaluation, and
performance assessments.
• In the Philippines, accountability mechanisms are in place to ensure that public funds are
used responsibly. COA audits government agencies, ensuring that they comply with
financial rules and regulations.
 • The public and civil society also play a role in monitoring the government's use of public
funds through transparency initiatives, freedom of information laws, and active
participation in governance.

4. Importance of Efficient Resource Allocation:

• Efficient resource allocation is vital for achieving the government's objectives and
addressing the country's needs effectively. It ensures that scarce resources are directed
toward priority areas, such as education, healthcare, and infrastructure development.
• Effective budgetary processes help avoid wasteful spending and ensure that funds are
channeled where they can have the most significant impact on the well-being of Filipinos.
• Transparent and accountable budgetary processes also enhance public trust in the
government and its ability to manage public finances responsibly.

In conclusion, the budgetary processes in the Philippines are fundamental for the effective
allocation of resources and the implementation of government programs and projects. These
processes involve multiple stakeholders, including the executive and legislative branches,
government agencies, and oversight bodies like COA. Ensuring the transparency, accountability,
and efficiency of these processes is essential for achieving the country's development goals and
improving the lives of its citizens.

4. Examine Public Expenditure: Analyze various forms of government spending, including

social programs, infrastructure development, and public goods provision, and evaluate
their impact on the well-being of citizens.

Analyzing various forms of government spending, including social programs, infrastructure

development, and public goods provision, is essential to understanding their impact on the well-
being of Filipino citizens. Public expenditure plays a critical role in shaping the quality of life,
economic development, and social equity in the Philippines. Here's a discussion of public
expenditure within the Philippine context:

1. Social Programs and Welfare Spending:

• Social programs in the Philippines encompass a range of initiatives aimed at improving the
well-being of citizens, especially those in vulnerable or disadvantaged situations. These
programs include conditional cash transfer schemes, healthcare subsidies, and education
assistance.
• The impact of social spending is substantial. For example, conditional cash transfer
programs provide financial support to low-income families, helping them meet basic needs,
access education, and improve their overall living standards.
• By targeting social spending effectively, the government addresses poverty and reduces
income inequality, contributing to social cohesion and a more equitable society.

2. Infrastructure Development:
 • Infrastructure development is a vital component of public expenditure in the Philippines.
Investments in transportation, energy, water supply, and other areas enhance the country's
economic productivity and connectivity.
• Infrastructure projects create jobs, stimulate economic growth, and improve the quality of
life for citizens. For example, better roads and public transportation systems reduce travel
time, boost trade, and enhance access to essential services.
• These investments contribute to regional development and reduce disparities in
infrastructure access between urban and rural areas.

3. Public Goods Provision:

• Public goods are essential for the well-being of society. These include public health
services, education, public safety, and environmental protection.
• Government spending on public goods ensures that all citizens have access to these
services, regardless of their income or location. For instance, public schools and hospitals
are accessible to Filipinos across the country.
• The provision of public goods contributes to human capital development, improved health
outcomes, and a safer and more sustainable environment.

4. Economic Stimulus and Job Creation:

• Public expenditure can be used as an economic stimulus, particularly during times of

economic downturn. The government may increase spending on infrastructure projects,
creating jobs and boosting economic activity.
• Investments in job-creating sectors, such as construction, agriculture, and manufacturing,
help reduce unemployment and underemployment.
• These measures are essential to promote economic recovery and stability, ultimately
benefiting the well-being of citizens.

5. Fiscal Responsibility and Efficiency:

• While public expenditure is crucial for improving the well-being of citizens, it must be
managed responsibly to ensure fiscal sustainability.
• Efficiency and effectiveness in public spending are critical. This involves careful planning,
budgetary discipline, and monitoring to minimize waste and corruption.
• Transparent and accountable public expenditure practices enhance public trust in
government institutions and ensure that funds are used for their intended purposes.

In conclusion, examining public expenditure in the Philippine context underscores its pivotal role
in improving the well-being of citizens and driving economic development. By strategically
allocating resources to social programs, infrastructure, and public goods provision, the government
can enhance living standards, reduce inequalities, and create a more prosperous and equitable
society for all Filipinos. Responsible and efficient management of public funds is essential to
achieving these goals and fostering sustainable development.
 5. Assess Fiscal Responsibility: Understand the concepts of fiscal responsibility,
sustainability, and accountability and examine their significance in maintaining sound
public finances and preventing financial crises.

Understanding the concepts of fiscal responsibility, sustainability, and accountability is crucial for
maintaining sound public finances and preventing financial crises in the Philippines. These
principles guide fiscal policies and practices to ensure that the government manages its resources
effectively and transparently. Here's a discussion of these concepts within the Philippine context:

1. Fiscal Responsibility:

• Fiscal responsibility refers to the prudent and disciplined management of government

finances. In the Philippine context, this involves making fiscal decisions that balance the
needs of the present with the needs of future generations.
• The Philippine government strives to maintain fiscal responsibility by avoiding excessive
borrowing and ensuring that spending aligns with available revenues.
• Fiscal responsibility is crucial for avoiding the accumulation of unsustainable levels of
debt, which could lead to a fiscal crisis.

2. Fiscal Sustainability:

• Fiscal sustainability involves the long-term viability of government finances. In the

Philippines, it is critical to ensure that the government can meet its financial obligations
over time without resorting to unsustainable borrowing.
• Factors such as population aging, social security obligations, and infrastructure
development plans must be considered when assessing fiscal sustainability.
• Long-term planning and fiscal reforms are essential to address potential challenges and
maintain a sustainable fiscal path.

3. Accountability and Transparency:

• Accountability and transparency in public finances are vital in the Philippines. These
principles promote responsible fiscal management and prevent corruption and misuse of
public funds.
• Institutions like the Commission on Audit (COA) play a key role in auditing government
accounts and ensuring that public funds are used efficiently and in accordance with the
law.
• Transparency initiatives, such as freedom of information laws and public reporting of
government expenditures, allow citizens to monitor and scrutinize government spending,
enhancing public trust in government institutions.

4. Debt Management:

• Managing government debt responsibly is a critical component of fiscal responsibility. The

Philippine government must carefully evaluate borrowing decisions to avoid excessive
debt burdens.
 • Debt should be used for productive investments, such as infrastructure development, that
generate returns and contribute to economic growth.
• Transparent and accountable debt management practices help ensure that debt remains at
manageable levels and that debt servicing does not crowd out essential public spending.

5. Counter-Cyclical Fiscal Policies:

• The Philippines employs counter-cyclical fiscal policies to stabilize the economy during
economic downturns. This involves increasing government spending during recessions to
boost demand and create jobs.
• However, maintaining fiscal discipline and sustainability is essential even during counter-
cyclical responses to prevent the accumulation of unsustainable deficits.

6. Disaster Preparedness:

• Given the Philippines' vulnerability to natural disasters, fiscal responsibility also includes
budgeting for disaster preparedness, response, and recovery.
• Adequate funding for disaster risk reduction and management is essential to mitigate the
economic and fiscal impact of natural calamities.

In conclusion, assessing fiscal responsibility, sustainability, and accountability is paramount in the

Philippine context to ensure the prudent management of public finances and prevent financial
crises. These principles help maintain fiscal discipline, transparency, and long-term viability in
government operations, ultimately safeguarding the well-being and economic stability of the
Filipino people. Responsible fiscal management contributes to sustainable development and
resilience in the face of various challenges.