Fundamental

Principles of Public
Finance
MARDAVE GOCHIUCO, MPM2
Public Finance
 branch of Economics which deals with the income and expenditure of a
government.
 The earlier economists were perfectly justified in giving this simple definition
because the functions of the public authorities in those days were simply to
raise revenue by imposing taxes for covering the cost of administration and
defense.
 Due to the increased activities of the state, expenditure of the public
authorities also increase. The sources of revenue have also increased. Taxes
are levied not for raising the revenue alone but are used as an important
instrument of economic policy.
 Public finance now includes the study of financial administration and control
as well.
1. Formulation of Fiscal policy
 Fiscal policy refers to decisions on taxation, and
other revenue, expenditure, and borrowings to stabilize the
economy, specifically by manipulating levels and allocations
of taxes and government expenditures.
 It is characterized by continuous and increasing levels of
debt and budget deficits
 Fiscal measures are frequently used in tandem with
monetary policy to achieve goals.
 2. Generation of Revenue
 Revenues – all cash inflows to the
national government treasury.
 Tax – compulsory contribution
mandated by law and exacted by the
government. Taxes on income and
profits are taxable on an individual,
partnership or corporations during a
period of time (one year). Taxes are
also imposed on local goods and
services. Major taxing agencies are
Bureau of Internal Revenue and Berea
of Customs.
 Non-tax revenues – collections of
government in exchange for services
rendered, assets conveyed, penalties
imposed, etc.
3. Expenditure of Funds – National
Budget
 Budget is an estimate expenditures for the government operation a
given period and the proposed means of financing them.

Budgetary Procedure
Budgetary Procedure – Preparation
and Presentation
 Estimation, determination and translation of government
revenues, priorities and activities.
 Government entities prepare their budget for the year to
be submitted to the Department of Budget and
Management for review.
 DBM consolidates all budgets to form a government
wide budgeting estimate – the National Budget.
 Final approval made by the President.
Budgetary Procedure – Budget
Authorization and Legislation
 Submission of the national government budget to the
legislative body for review, deliberation, and formulation
of an appropriation bill to be forwarded to the president
for approval and signature.
Budgetary Procedure – Budget
Execution and Operation
 Implementation of various operational aspect of the
budget (release of allotments to the various agencies,
continuing review of the fiscal position, etc.)
Budgetary Procedure – Budget
Accountability
 Evaluation of expenditures and performance against the
predetermined budget.
 Obligations incurred, personnel used and work
accomplished are compared with the submitted places
and goals during budget preparation.
 Accomplished by the heads of various agencies who
review the performance of their respective agency. IT
also includes the Commission on Audit.
4. Public Borrowings
 Borrowings are funds obtained from repayable sources (loans)
from financial institutions and other sources (domestic or foreign).
 The government borrows from any of the
following reasons:
i. to finance national government deficits;
ii. to obtain foreign exchange;
iii. to secure financing at more favourable terms than the
opportunity cost of revenues;
iv. to take advantage of benefits attached to the
funds, e.g. technology; and,
v. to balance the timing of resources with the project gestation
and repayment of benefit
5. Accountability
 The check and balance of an institution wherein administrator
accounts for his stewardship of resources or authority.
 Constitutional bodies: 1) constitutional commissions - CSC, COA,
COMELEC; 2) constitutionally created/mandated special bodies
– CHR and Ombudsman
Public Finance versus Business
Finance
Private Public
Ownership Individuals owning / leading Government
company
Objectives Private consumptions or earn profit Promote society’s welfare
(Present) (Future)
Expenditures Expenditure adjusted to income. Income adjusted to
expenditure
Method of raising income Sales, investments Has power to raise revenues
(compulsory contributions) –
tax revenues, fines and tariffs
Mode of Procurement Own discretion/preference (save Bidding (quality and budget)
money and get things done faster)
Disclosure of Financial Confidential Transparent
Standing
What is government's role in the
economy?
The government provides the legal structure needed by
the market economy to operate effectively.
 Sets the legal status of enterprises
 Ensures rights of private ownership
 Allows the making and enforcement of contracts.
 Establishes the legal “rules of the game”
Functions of Government: Market
Failures
 Market failure is the economic situation defined by an
inefficient distribution of goods and services in the free
market leading to a net social welfare loss. This happens
when the price mechanism leads to an inefficient
allocation of resources and loss in the economic welfare.
Even with free market, sometimes the price is not right.
Negative Externality
 External causes Ban use of chemicals
that makes
people (3rd party) Regulate what can be
worse off
dumped in river
Regulatory
policies
Government
Intervention

Market-based POLLUTION FROM THE FACTORY!!

policies Tax on production
Tax on harmful chemicals used
Positive Externality
 External causes that
makes people better
off.

Regulatory Taxes pay for schools -

policies affordable
Government Productive
Intervention
Member society
Market-based Subsidies increase Tax revenue
policies education when earning
income
Externalities

Social Cost paid to

Cost everyone

External Cost paid by

Cost 3rd party
Externalities
Externalities
Principle of Maximum Social
Advantage
 AC Pigou has named this as Principle of Total Social Welfare while other writers
call it as Principle of Public Finance.
 The fiscal operations of the state should be governed by the principle of
maximum social advantage. The planner and the policy maker should always
bear this principle in mind while raising revenue through taxation and incurring
expenditure on different heads.
 The principle of maximum social advantage requires that the revenue and
expenditure of the State should be so managed that maximum net advantage
occurs to the society taking into account the social sacrifice involve in taxation
and the social benefit flowing from public expenditure. The state of maximum
social advantage is the level of fiscal operation at which
the marginal social sacrifice and the marginal social benefit both are equal
Functions of Government:
Economic Stabilization
 Macroeconomic stability is said to exist when an economy's
output matches its production capacity.
 its labor resources are fully employed,
 and inflation is low and stable.
 Government and the nation's central bank promote full
employment and price stability through prudent fiscal policy
(government taxing and spending policy) and monetary policy
(central bank interest rate policy).
 To stabilize the growth, fiscal policy and monetary policy are
review and monitored.
REFERENCES

Rosen H.S. (2004) Public Finance. In: Rowley C.K., Schneider F. (eds) The
Encyclopedia of Public Choice. Springer, Boston, MA
Functions of The Government: Market Failures. Retrieved From:
https://www.educba.com/market-failure-and-the-role-of-government/
Functions of Government: Economic Stabilization. Retrieved From:
https://saylordotorg.github.io/text_exploring-business-v2.0/s05-07-
government-s-role-in-managing-.html