By the end of the topic, the learner should be able to:
Public finance refers to the activities carried out by the government associated with raising of finances and the spending of the finances raised (it is the study of how government collects revenue and how it spends it)
The components of public finance are;
Purpose of public finance
Sources of public finance
There are two major sources of public finance i.e.
This is the income that the government gets from its citizens. The main sources of public revenue are:
This refers to borrowing by government from firms and individuals within the country. This may be done through:
Open market operation; the government sells its securities such as treasury bonds and treasury bills. This however has a disadvantage of causing ‘crowding out effect’ where the government leaves the private investors with little to borrow from.
Classes of public (National debt)
These are two classes of national debt:
This is borrowed money used to finance project(s) that can generate revenue. Such projects, once started may become self-sustaining and may contribute towards servicing/repaying the debt. E.g. money used to finance irrigation schemes, electricity production etc.
This is borrowed money that is used to finance activities that do not generate any revenue. Examples are money used to finance recurrent expenditure e.g. payment of salaries or for famine relief etc.
Dead-weight debt is a burden to members of the public since they are the ones who are expected to contribute towards its repayment.
Factors to consider before the government decides whether to borrow internally or externally
This refers to how the government spends the finances it has raised on behalf of its citizens.
Categories of government expenditure
This refers to government spending that takes place regularly e.g. payments of salaries to civil servants, fuelling of government vehicles e.g.
Every financial year, the government must allocate funds to meet such expenditure.
Recurrent expenditure is also known as consumption expenditure.
This is also referred to as capital expenditure .It is government spending on projects that facilitate economic development. Such projects includes construction of railway lines, roads, airports, rural electrification etc.
Once completed expenditure on such projects ceases and may only require maintenance.
This is expenditure on things/people who do not directly contribute to a country’s national income. Such expenditure include money spent on famine relief, pension, bursaries etc.
Principles of Public/Government Expenditure
These are the considerations that are necessary before any expenditure can be incurred by the government.
Tax: is a compulsory payment by either individuals or organizations to the government without any direct benefit to the payer.
Taxation-refers to the process through which the government raises revenue by collecting taxes.
Purposes/reasons for taxation
Principles of taxation
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question & answer session
Discuss five principles of taxation
Outline five sources of non-tax public revenue
Explain five principles of public expenditure
Highlight five reasons for imposition of tax by the government
Discuss five characteristics of a good tax system
Outline five reasons why the Kenya government must impose tax
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Business Studies Notes Form 1 - 4
Atika School Team