CHAPTER TEN
PUBLIC FINANCE
Public finance refers to the activities carried out b y the go vernment associated with raising of
finances and the spending of the finances raised (it is the stud y o f ho w go vernment collects
revenue and ho w it spend s it)
The co mponents of public finance are;
i. Public revenue
ii. Public expenditure
iii. Public debt
i. Public revenue refers to the revenues (inco me) and resources
received b y the government fro m different so urces.
ii. Public expenditure refers to the resources spent b y the go vernment.
iii. Public debt -refer s to the money and reso urces borrowed b y the go vernment.
Purpose of public finance
i. Provision of essential goods and services.
The government has a responsibility o f providing its citizens with essential go ods and services
such as security, health, schools, drought co ntrol, law e.t.c such facilities and services may not
be adequately covered b y the private sector because of the high costs involved and risks.
ii. Enco uraging consumption of certain co mmo dities
The government may encourage co nsumptio n of certain co mmodities e.g. maize b y subsidizing
on their productions or lo wering their taxes.
iii. Controlling consumption of certain co mmo dities
The government may also encourage consump tion of so me co mmodities e .g. cigarettes and
alcohol b y imposing heavy taxes o n them.
iv. Pro motion of Balanced regional develop ment
This may be done b y initiating eco no mic projects in areas that are under developed/lagging
behind.
v. Wealth Redistributio n
This is done b y heavily t axing the rich and
using the money raised to provide goods and services that benefit the poor
vi. To pro mote econo mic stability
Econo mic instability may be caused b y factors such as unemplo yment. Such problems can be
solved through public expenditure in pr ojects that generate emp lo yment such as ‘kazi kwa
vijana’
vii. Creation of a conducive Business Environment
Through public expenditure, the go vernment may develop infrastructure such as roads,
electricity, security e.t.c thereb y creating a co nducive enviro nment for businesses to thrive in.
viii. To raise govern ment revenue
Through public finance, the gover nment raises revenue which it uses in provision o f essential
goods and services to the public.
ix. I mproving balance o f pay ment
This may be done b y imp rov ing heavy taxes such as custo ms d uty to disco urage importation.
Sources of public finance
There are two major sources of p ublic finance i.e.
i. Public revenue
ii. Public debt (go vernment borro wing)
i. Public revenue
This is the inco me that the gover nment gets fro m its citizens. The main so urces o f public
revenue are:
a. Tax:
This is a co mpulsor y payment levied b y the go vernment on individ uals and firms without any
ECONOMICS CHAPTER 10 PUBLIC FINANCE NOTES PREPARED BY MR. ANTONY AMBIA Page 1
, direct benefit to the payer.
b. Fines and penalties
These are the char ges imposed on individ uals, firms and corporations who break the laws o f the
country.(o ffenders)
c. Fees;
These are the payments charged b y the go vernment for the direct services it renders to its
people e.g. road licence fee, marriage certificate fee and import licence fee.
d. Rent and rates:
Charged on use of gover nment properties e.g. game parks, forests e.t.c
e. Eschiats:
Inco me obtained fro m pr operties of perso ns who die witho ut legal heirs or proper wills. Such
people’s properties are taken over b y the state.
f. Dividends and profits:
These are the inco me received fro m the government direct investments e.g. inco me/surplus fro m
public corporations.
g. Interest fro m loans
This is the interest on loans ad vanced b y the government to firms
and individ uals through its age ncies such as ICDc,AFC e.t.c.
h. Proceeds fro m scale of government property .
Public debt ( Government borrowing)
This is the mo ney that the gover nment borro ws when public revenue is insufficient to meet all
its financial obligatio ns.
Government borro wing is also referred to as national debt.
It includes all outstanding borro wing b y the central government, local authorities and
government corporations.
These are two majorly two sources of public debts:
a. Internal borro wing
b. External borro wing
a. Internal borrowing
This refers to borro wing b y go vernment fro m firms and individuals within the co untry.
This may be done through:
Open market operation;
The government sells its securities such as treasury bonds and treasury bills.
This ho wever has a disadvantag e of causing ‘cro wding out effect’ where the government leaves
the private investor s with little to borro w fro m.
b. External borrowing
This refers to go vernment borrowing fro m external sources. It may either be on a bilateral or
multilateral basis.
Bilateral borro wing is where the go vernment borro ws directly fro m another country.
M ultilateral borrowing
Is where the government borrows fro m internatio nal financial institutions such as internatio nal
monetary fund (IMF).
World Bank, Afr ican Develop ment bank e .t.c. such bodies get finances fro m vario us sources
which they lend to their member countries who are in need of such fund s.
Generally, exter nal borrowing has strings attached.
The borrowing countr y is expected to meet so me set conditio ns, so metimes adversely affecting
so me sectors o f the econo my.
The total internal borro wing (internal debt) added to the total external borro wing (external debt)
constitutes the national d ebt.
Classes of public (Natio nal debt)
These are two classes o f natio nal debt:
ECONOMICS CHAPTER 10 PUBLIC FINANCE NOTES PREPARED BY MR. ANTONY AMBIA Page 2
PUBLIC FINANCE
Public finance refers to the activities carried out b y the go vernment associated with raising of
finances and the spending of the finances raised (it is the stud y o f ho w go vernment collects
revenue and ho w it spend s it)
The co mponents of public finance are;
i. Public revenue
ii. Public expenditure
iii. Public debt
i. Public revenue refers to the revenues (inco me) and resources
received b y the government fro m different so urces.
ii. Public expenditure refers to the resources spent b y the go vernment.
iii. Public debt -refer s to the money and reso urces borrowed b y the go vernment.
Purpose of public finance
i. Provision of essential goods and services.
The government has a responsibility o f providing its citizens with essential go ods and services
such as security, health, schools, drought co ntrol, law e.t.c such facilities and services may not
be adequately covered b y the private sector because of the high costs involved and risks.
ii. Enco uraging consumption of certain co mmo dities
The government may encourage co nsumptio n of certain co mmodities e.g. maize b y subsidizing
on their productions or lo wering their taxes.
iii. Controlling consumption of certain co mmo dities
The government may also encourage consump tion of so me co mmodities e .g. cigarettes and
alcohol b y imposing heavy taxes o n them.
iv. Pro motion of Balanced regional develop ment
This may be done b y initiating eco no mic projects in areas that are under developed/lagging
behind.
v. Wealth Redistributio n
This is done b y heavily t axing the rich and
using the money raised to provide goods and services that benefit the poor
vi. To pro mote econo mic stability
Econo mic instability may be caused b y factors such as unemplo yment. Such problems can be
solved through public expenditure in pr ojects that generate emp lo yment such as ‘kazi kwa
vijana’
vii. Creation of a conducive Business Environment
Through public expenditure, the go vernment may develop infrastructure such as roads,
electricity, security e.t.c thereb y creating a co nducive enviro nment for businesses to thrive in.
viii. To raise govern ment revenue
Through public finance, the gover nment raises revenue which it uses in provision o f essential
goods and services to the public.
ix. I mproving balance o f pay ment
This may be done b y imp rov ing heavy taxes such as custo ms d uty to disco urage importation.
Sources of public finance
There are two major sources of p ublic finance i.e.
i. Public revenue
ii. Public debt (go vernment borro wing)
i. Public revenue
This is the inco me that the gover nment gets fro m its citizens. The main so urces o f public
revenue are:
a. Tax:
This is a co mpulsor y payment levied b y the go vernment on individ uals and firms without any
ECONOMICS CHAPTER 10 PUBLIC FINANCE NOTES PREPARED BY MR. ANTONY AMBIA Page 1
, direct benefit to the payer.
b. Fines and penalties
These are the char ges imposed on individ uals, firms and corporations who break the laws o f the
country.(o ffenders)
c. Fees;
These are the payments charged b y the go vernment for the direct services it renders to its
people e.g. road licence fee, marriage certificate fee and import licence fee.
d. Rent and rates:
Charged on use of gover nment properties e.g. game parks, forests e.t.c
e. Eschiats:
Inco me obtained fro m pr operties of perso ns who die witho ut legal heirs or proper wills. Such
people’s properties are taken over b y the state.
f. Dividends and profits:
These are the inco me received fro m the government direct investments e.g. inco me/surplus fro m
public corporations.
g. Interest fro m loans
This is the interest on loans ad vanced b y the government to firms
and individ uals through its age ncies such as ICDc,AFC e.t.c.
h. Proceeds fro m scale of government property .
Public debt ( Government borrowing)
This is the mo ney that the gover nment borro ws when public revenue is insufficient to meet all
its financial obligatio ns.
Government borro wing is also referred to as national debt.
It includes all outstanding borro wing b y the central government, local authorities and
government corporations.
These are two majorly two sources of public debts:
a. Internal borro wing
b. External borro wing
a. Internal borrowing
This refers to borro wing b y go vernment fro m firms and individuals within the co untry.
This may be done through:
Open market operation;
The government sells its securities such as treasury bonds and treasury bills.
This ho wever has a disadvantag e of causing ‘cro wding out effect’ where the government leaves
the private investor s with little to borro w fro m.
b. External borrowing
This refers to go vernment borrowing fro m external sources. It may either be on a bilateral or
multilateral basis.
Bilateral borro wing is where the go vernment borro ws directly fro m another country.
M ultilateral borrowing
Is where the government borrows fro m internatio nal financial institutions such as internatio nal
monetary fund (IMF).
World Bank, Afr ican Develop ment bank e .t.c. such bodies get finances fro m vario us sources
which they lend to their member countries who are in need of such fund s.
Generally, exter nal borrowing has strings attached.
The borrowing countr y is expected to meet so me set conditio ns, so metimes adversely affecting
so me sectors o f the econo my.
The total internal borro wing (internal debt) added to the total external borro wing (external debt)
constitutes the national d ebt.
Classes of public (Natio nal debt)
These are two classes o f natio nal debt:
ECONOMICS CHAPTER 10 PUBLIC FINANCE NOTES PREPARED BY MR. ANTONY AMBIA Page 2
