Government Finance | NEB Class 12 Economics

Government Finance

Government finance, which is also called public finance, is one of the economics which deals about government & government expenditure. It deals about sources of government revenue & headings of government expenditure etc.

Importance or Role of Government Finance

In modern economy due to ever increasing needs of the people, the role of public sector is also increasing. It aims to maintain economic stability, ensures equitable distribution of income & social justice, remove economic maladies & stimulate healthy economic growth.

Some major roles or points of importance of government finance are:

1. Equitable distribution of income & wealth to its citizens. For this purpose, government tries to bridge the gap between rich & poor by imposing progressive tax policy. The amount of revenue so collected is used through policy expenditure on health, education, drinking water & so on to increase the living standard of the people. It helps to narrow down the gap between rich & poor people in the society.

2. To maintain economic stability: stability, the contractionary fiscal policy during the period of over production & expansionary fiscal policy during the period of underproduction. Public finance is an important tool to implement economic stability in the country.

3. For economic development: The responsibility of developing different types of infrastructures goes to the government. The primary role of the government is to develop various types of infrastructure, so public finance is like transportation, communication, electricity, schools, college, university, drinking water & so on. Government should make large amounts of investment through public expenditure for the development of infrastructures.

4. To increase agricultural industrial production: The development of agriculture industry depends upon the government fiscal policy. If the government implements subsidized tax policy & business-friendly environment for industrial sector, there would be low cost of production. Low costs of production helps for large-scale production.

5. To achieve favorable balance of payments (BOP): A country may achieve surplus in BOP by raising import taxes on foreign goods or by reducing export taxes on domestic goods in the international market. Therefore, the tax policy of the government may play significant role to achieve favorable balance of payments.

6. Capital formation: The government can increase the public saving by means of tax. The rate of saving should be increased for the higher level of investment. A large fund is collected through government finance if it can be invested for the formation of physical & human capital.

Public Expenditure

The Expenditure made by government in different sectors of the welfare of public is called public expenditure or government expenditure.

Importance of Government Expenditure

1. To maintain law & order: Maintaining law & order in the country is the exclusive responsibility of public authority or government. To carry out this function, government should allocate large amounts of budget every year. For eg: it includes the expenditure made by government on various courts, police etc.

2. To maintain national security: The next importance of public expenditure lies in the field of national security. For this purpose, government allocates large amount of budget every year for national defence, police & other security forces.

3. To provide administrative services: Public authority of a country should provide various types of administrative services to its citizens. The government should allocate budget to carry out administrative services of different ministries, departments, local offices & so on.

4. To invest in infrastructure: Types of infrastructures is the exclusive responsibility of the government. Government should make investments on road, transport, communication, health, education, social services etc. For that purpose government should allocate large amount of budget.

5. To maintain economic equality in the society: There may be unequal distribution of income & wealth in the society. Some people may be rich & others poor. So government must provide facilities & services to poor people through public expenditure in the development of transport, communication, health, education etc.

Government Revenue

The revenue that the government collects from various sources in one fiscal year is called public revenue. Due to the ever increasing needs of the people, responsibility of the government, the importance of public revenue is always increasing. Government needs large amounts of money to invest in different sectors for the welfare of citizens.

Source of Government Revenue

There are three broad sources of government revenue:

• A. Tax revenue
• B. Non-Tax Revenue
• C. Foreign Aid

A. Tax Revenue

Tax is the major source of government revenue in any country. There are direct & indirect taxes. Government collects tax revenue from the following headings.

1. Tax on income, property & profit: It includes the revenue received by government from income tax, profit tax, interest tax, tax on property, etc.

2. Land revenue & registration tax: It includes the income received by government from land tax, land registration tax, house tax, house registration tax, & so on.

3. Customs: It is the greatest source of tax revenue. It includes the income obtained from import & export duties imposed by the government on goods & services.

4. Tax on production & consumption of goods & services: Government imposes different types of taxes on consumption & production of goods & services. So, it includes the income received by government from value added tax, sales tax, excise duty, entertainment tax, road tax so on.

B. Non-tax Revenue

Government receives non-tax revenues from the following headings.

1. Fees, licenses & permits: Government collects revenue in the name of fees like education fee, health check-up fee, training & registration fees, etc. Likewise, government receives income by providing licenses for vehicles, various businesses & weapons. In the similar manner, government provides permission to visit zoo, national park, route permit, & so on which generate income for the government.

2. Fines: Fines are legal obligations even if it is not a compulsory payment like tax. Those person who violate the law or do not pay their dues in time should pay a fine to the government. It is a legal obligation that it must be paid by those who violate the law. Though the government does not charge fine in order to collect the revenue, it does so to maintain the law & order in the country.

3. Income from public properties & public enterprises: The income that the government receive from the sale of public goods services or public properties lies under this heading. It includes the income obtained from the sale of public properties like land, vehicles, industries etc. It also includes the dividend received from public enterprises.

4. Other sources: It includes the income obtained by the government from betterment levy, escheats & other sources.

C. Foreign Aid

The income received by government from foreign governments & institutions for various purposes is called foreign aid. Foreign aid is also of two types: loan & grant. If the grant is received by making agreements between two nations, it is called bilateral grant. If the grant is taken by making agreements with international institutions, it lies under multilateral heading.

Tax

The compulsory monetary charge imposed by government for its citizens & institutions for the services provided in different sectors is called tax.

Types of Tax

There are two types of taxes. They are:

• Direct tax
• Indirect tax

A. Direct Tax

The tax which is paid by the person or an institution upon which it is imposed by the government & cannot be shifted to others is called direct tax. The major feature of direct tax is that its burden, incidence & the impact falls upon the same person or institutions. Example of direct tax are income tax, profit tax, interest tax etc.

B. Indirect Tax

The tax which is imposed on one person or an institution but its burden can be shifted to another person is called indirect tax. The government imposes indirect taxes on goods & services but it is ultimately paid by consumers. The example of indirect tax are customs duty (i.e. tax imposed on imports & exports of goods & services), value added tax (VAT), sales tax, excise duty etc.

Public Borrowing

The money or fund taken by the state in the form of loan from different sources is called public borrowing. It is also called government borrowing.

Objectives or Importance of Government Borrowing

1. To meet budget deficit: Due to ever increasing responsibility to meet various needs of the citizen deficit budget is prepared. They need large amount of funds to invest in various sectors including infrastructure development, so they formulate deficit budgets to fulfill the gap between revenue & expenditure. They borrow from various sources.

2. Due to period of war, the normal amount of expenditure does not meet the need of the government. So, extra fund is needed to settle down the problems of war; it is possible because of public borrowing.

3. To solve the problem of unemployment: To solve the problem, investment in the economy should be increased. For that purpose, government borrows from different sources. It helps to establish the number of industries, development activities.

4. To develop infrastructure: Infrastructure development is the sole responsibility of the government. The existing resource would not be sufficient to invest in desired infrastructures. So, the government should borrow.

5. For industrialization: The government borrows the loan for the proposed industrial development in the country.

6. To eradicate poverty: Developing countries are suffering from high rate of poverty. So, the government borrows from different sources. It helps to eradicate poverty by providing job opportunities to the people in different sectors.

7. To utilize natural resources: Different countries are rich in different types of natural resources. For eg. Nepal is rich in water, forest & minerals. Such resources can be utilized by using the borrowed amounts from different sources.

Sources of Government Borrowing or Debt

There are two broad sources of government borrowing:

• A. Internal borrowing
• B. External or International borrowing

1. Internal Borrowing

The fund or loan collected by the government from its people & financial institutions within the country is called internal borrowing. There are two sources of internal borrowing. They are as follows:

A. Market borrowing

Market borrowing is that borrowing in which government collects the loan by selling transferable government securities like treasury bills, bill of exchange, foreign currency, government bonds etc. This type of borrowing is voluntary in nature. The government pays interest on borrowing.

B. Non-Market Borrowing

If the government borrowed loan without selling its securities, it is called non-market borrowing. Under this type of government collections from public sector organization such as insurance companies, Agriculture Development Bank, Industrial Development Bank, Post Savings Bank, so on. If the fund is still not sufficient, then the government collects loan even from private sector organizations like various commercial banks, insurance companies, financial companies, development banks, so on. The government pays interest to them.

2. External or International Borrowing

If the government borrows from foreign governments or international institutions, it is called external or international borrowing. There are two sources of external borrowing.

If the government borrows by making agreements with various countries, it is called bilateral borrowing. Loans taken from Japan, Canada, Norway & so on are bilateral borrowing.

When the government borrows from international organizations it is called multilateral borrowing. Loans taken from World Bank, Asian Development Bank, European Union etc are multi-lateral borrowing.