ELEC 105- PUBLIC FINANCE
“There is liberty in personal finance; there is a certain extent of
freedom in corporate finance; however the restoration of
democracy depends upon public finance.” - MGPR
A. Definitions of Public Finance
- the study of the role of the government in the economy. (Jonathan
Gruber)
- the investment into the nature and principles of state expenditure
and state revenue. (Adam Smith)
- the collection of taxes from those who benefit from the provision
of public goods by the government, and the use of those tax funds
toward production and distribution of the public goods. (Business
Dictionary)
- the aggregate of economic relationships arising from the creation
and use of centralized and decentralized monetary resources. (B.G.
Boldyrev)
- a branch of economics which deals with the revenue and
expenditure patterns of the government and their various effects
on the economy. (J. Smith)
- a branch of economics which deals with income and expenditure of
public authorities or the state and their mutual relation as well as
the financial control of national wealth which help in
carrying on the administration of the state.
(Professor Bastable)
- often synonymous to public financial management, public
fiscal administration, public economics, fiscal management or
public sector management.
B. Key Features of Public Sector
1. The public sector is broad. It encompasses all organizations
that receive their funding from public sources such as taxes, fees or
licenses. Therefore, it will embrace not just government
departments, but also government enterprises.
2. The public sector has multiple goals. Rather than having a
single bottom‐line, the public sector has several, which are being
pursued at once.
3. The public sector uses various tools to reach it goals. There
are a series
2
, ELEC 105- PUBLIC FINANCE
of instruments used to achieve the goals of government.
4. The public sector often uses the private sector to deliver
public goods. Modern governments frequently use contracts with
private corporations as a means of acquiring needed expertise,
outsourcing work, or extending their workforces while seeming to
contain the growth of the public service. This contracted work does
not mean that the regular public service is relieved of its
accountability for public funds. Governments devote considerable
energy to administering contracts, especially during a period of
increased scrutiny by the public and by the contracting community
in particular.
5. The public sector is a democratic institution. Governments
own none of the resources they spend. Taxpayers do. In a
democratic society, the ways in which governments spend resources
must be transparent and readily open to questioning. Accounting for
public sector funds and their proper expenditure is not only part of
good management, it is essential to good government and good
governance of the public enterprise. It is also where
governments are most heavily scrutinized and where they can get
into a great deal of trouble. Such scrutiny is one of the basis of a
government’s legitimacy.
C. Key Features of Public Finance (PF)
1. PF involves the collection of money. The public sector makes
most of its money through taxation, transfers, fees, and the sale of
goods.
2. PF involves allocating resources. The income of the public
sector is not tied to any one specific goal. Rather, public sector funds
are consolidated into a Consolidated Revenue Fund (CRF) and subjected
to a democratic decision making process that distributes them across a
range of activities. This is known as the budgetary process. There are
exception to this rule in which specific taxes or fee are directed to
specific programs. A Budget tells the public how the government intends
to spend its money. The budgetary process is a planning tool and a tool
of regulation and control. A government budget sets a legal limit for
expenditures. It also creates the legal authorization for delegated
officials to spend fund. A budget is also the tool by which the
government’s financial performance is judged. Managers are held to
account for their performance relative to the budget.
3. PF involves spending money. Delegated officials are expected
to spend public funds fo the purposes for which they were allocated.
Therefore, PF involves having controls in place to monitor expenditures.
4. PF involves oversight—watching the money. The
government must frequently and systematically monitor and report
on the flow of money. This ensures actual financial activity matches
planned financial activity. Financial roles and responsibilities as well as
financial reporting timelines, are outlined in law to ensure specific
individuals are linked to the success or failure of a particular stage in
the financial process. Information systems support these roles by
making public servants aware of their level of progress. Legislation
creating public organizations can be very broad with respect to the
2
, ELEC 105- PUBLIC FINANCE
amount of legislative control that is exerted as the organization goes
about its day-to-day business. Legislatures seldom engage in the actual
management of public organizations. Rather,they serve other key roles
creating the organization,setting out the policies that they will carry
out,providing the funding to carry out the policies, holding the
otganization to account either directly or through external auditors
appointed by and responsible to the legislatures.
5. PF involves accounting for money collected and money
spent. The public sector must assure the public that its money is
being spent well. This means they need to ask:
- Is money being spent for an appropriate use – for the public
good?
- Are funds being allocated for the stated purpose?
- Are funds being spent according to the rules that apply?
- Did the funds achieve the intended results?
- Can the funds be traced and identified?
- Can others assess the financial information of the organization–
external review or audit? Essentially, past financial behavior must
be reconciled, audited, and reviewed in relationship
to the budget to give the legislature and public the assurances that
funds were spent for their intended purpose. The public accounts
and the associated financial statements are the main documents
used by government to show financial activity.
6. PF involves taking care of assets. Public sector organizations
build or acquire capital assets. They own capital assets, which can be
considerable, in order to deliver services and the public good objectives
that they want to achieve. Consequently, the Public sector has
considerable maintenance requirements and operational costs.
Financial managers must ensure that assets are properly purchased and
sustainable.
7. PF does require due regard for process, record‐keeping and
reporting. There can be a tension between the objectives of the public
service to quickly serve the needs of citizens and effective financial
management, seeing it as inhibiting effective client service through
excessive controls, inadequate funding or a preoccupation with
paperwork. Nonetheless, these requirements remain essential for
2
“There is liberty in personal finance; there is a certain extent of
freedom in corporate finance; however the restoration of
democracy depends upon public finance.” - MGPR
A. Definitions of Public Finance
- the study of the role of the government in the economy. (Jonathan
Gruber)
- the investment into the nature and principles of state expenditure
and state revenue. (Adam Smith)
- the collection of taxes from those who benefit from the provision
of public goods by the government, and the use of those tax funds
toward production and distribution of the public goods. (Business
Dictionary)
- the aggregate of economic relationships arising from the creation
and use of centralized and decentralized monetary resources. (B.G.
Boldyrev)
- a branch of economics which deals with the revenue and
expenditure patterns of the government and their various effects
on the economy. (J. Smith)
- a branch of economics which deals with income and expenditure of
public authorities or the state and their mutual relation as well as
the financial control of national wealth which help in
carrying on the administration of the state.
(Professor Bastable)
- often synonymous to public financial management, public
fiscal administration, public economics, fiscal management or
public sector management.
B. Key Features of Public Sector
1. The public sector is broad. It encompasses all organizations
that receive their funding from public sources such as taxes, fees or
licenses. Therefore, it will embrace not just government
departments, but also government enterprises.
2. The public sector has multiple goals. Rather than having a
single bottom‐line, the public sector has several, which are being
pursued at once.
3. The public sector uses various tools to reach it goals. There
are a series
2
, ELEC 105- PUBLIC FINANCE
of instruments used to achieve the goals of government.
4. The public sector often uses the private sector to deliver
public goods. Modern governments frequently use contracts with
private corporations as a means of acquiring needed expertise,
outsourcing work, or extending their workforces while seeming to
contain the growth of the public service. This contracted work does
not mean that the regular public service is relieved of its
accountability for public funds. Governments devote considerable
energy to administering contracts, especially during a period of
increased scrutiny by the public and by the contracting community
in particular.
5. The public sector is a democratic institution. Governments
own none of the resources they spend. Taxpayers do. In a
democratic society, the ways in which governments spend resources
must be transparent and readily open to questioning. Accounting for
public sector funds and their proper expenditure is not only part of
good management, it is essential to good government and good
governance of the public enterprise. It is also where
governments are most heavily scrutinized and where they can get
into a great deal of trouble. Such scrutiny is one of the basis of a
government’s legitimacy.
C. Key Features of Public Finance (PF)
1. PF involves the collection of money. The public sector makes
most of its money through taxation, transfers, fees, and the sale of
goods.
2. PF involves allocating resources. The income of the public
sector is not tied to any one specific goal. Rather, public sector funds
are consolidated into a Consolidated Revenue Fund (CRF) and subjected
to a democratic decision making process that distributes them across a
range of activities. This is known as the budgetary process. There are
exception to this rule in which specific taxes or fee are directed to
specific programs. A Budget tells the public how the government intends
to spend its money. The budgetary process is a planning tool and a tool
of regulation and control. A government budget sets a legal limit for
expenditures. It also creates the legal authorization for delegated
officials to spend fund. A budget is also the tool by which the
government’s financial performance is judged. Managers are held to
account for their performance relative to the budget.
3. PF involves spending money. Delegated officials are expected
to spend public funds fo the purposes for which they were allocated.
Therefore, PF involves having controls in place to monitor expenditures.
4. PF involves oversight—watching the money. The
government must frequently and systematically monitor and report
on the flow of money. This ensures actual financial activity matches
planned financial activity. Financial roles and responsibilities as well as
financial reporting timelines, are outlined in law to ensure specific
individuals are linked to the success or failure of a particular stage in
the financial process. Information systems support these roles by
making public servants aware of their level of progress. Legislation
creating public organizations can be very broad with respect to the
2
, ELEC 105- PUBLIC FINANCE
amount of legislative control that is exerted as the organization goes
about its day-to-day business. Legislatures seldom engage in the actual
management of public organizations. Rather,they serve other key roles
creating the organization,setting out the policies that they will carry
out,providing the funding to carry out the policies, holding the
otganization to account either directly or through external auditors
appointed by and responsible to the legislatures.
5. PF involves accounting for money collected and money
spent. The public sector must assure the public that its money is
being spent well. This means they need to ask:
- Is money being spent for an appropriate use – for the public
good?
- Are funds being allocated for the stated purpose?
- Are funds being spent according to the rules that apply?
- Did the funds achieve the intended results?
- Can the funds be traced and identified?
- Can others assess the financial information of the organization–
external review or audit? Essentially, past financial behavior must
be reconciled, audited, and reviewed in relationship
to the budget to give the legislature and public the assurances that
funds were spent for their intended purpose. The public accounts
and the associated financial statements are the main documents
used by government to show financial activity.
6. PF involves taking care of assets. Public sector organizations
build or acquire capital assets. They own capital assets, which can be
considerable, in order to deliver services and the public good objectives
that they want to achieve. Consequently, the Public sector has
considerable maintenance requirements and operational costs.
Financial managers must ensure that assets are properly purchased and
sustainable.
7. PF does require due regard for process, record‐keeping and
reporting. There can be a tension between the objectives of the public
service to quickly serve the needs of citizens and effective financial
management, seeing it as inhibiting effective client service through
excessive controls, inadequate funding or a preoccupation with
paperwork. Nonetheless, these requirements remain essential for
2
